A raft of Bermuda’s biggest reinsurance companies could see profits drop by up to 24 percent because of a move by Florida to subsidise hurricane insurance costs for its residents, according to analysts’ predictions.

By doubling the size of its state-sponsored catastrophe insurance funds Florida legislators are making good on a promise to bring relief to homeowners struggling to afford increasingly expensive premiums in the hurricane-vulnerable region.

But the wisdom of the move has come in for scrutiny by industry experts who doubt the state will financially survive a bad hurricane season, such as those of 2004 and 2005.

No hurricane made landfall in the US in 2006, but that was a unusually quiet year in what is considered a high-activity period likely to last up to 15 years. It is feared a violent year for hurricanes could expose Florida to greater losses than the $32 billion of reinsurance coverage (up from $16 billion) to be made available to private insurers at subsidised rates through the Florida Hurricane Catastrophe Fund and Citizens Property Insurance Corporation.

The Florida move is expected to be signed into law by Governor Charlie Crist this week and it is believed will effectively price international reinsurers out of Florida’s domestic market, unable to compete with the subsidised state rates.

RenaissanceRe is generally accepted to have the biggest stake in the Florida domestic market and therefore would have the most to lose, but other Bermuda-based companies currently offering coverage include Montpelier Re, Aspen Insurance Holdings, Axis Capital Holdings, Endurance Specialty Holdings and XL Capital.

The size of profit losses for the companies will range from 24 percent to seven percent depending on their level of business in Florida, predict analysts Vinay Misquith of Credit Suisse Group, and Alain Karaoglan of Deutsche Bank.

But there is another side to the coin, and that is the view that the US state is embarking on a substantial “gamble” that could backfire if hurricanes wreak hefty damage across Florida.

If the State’s cash pot is drained by claims — as some feel it will be in the event of a bad hurricane season — Florida would need to be bailed out by Washington DC authorised Federal aid.

International ratings agency Fitch said it: “Considers the highly politicised and regulated Florida insurance market to be extremely fragile. Unfortunately, Florida can regulate insurance but not the weather.

“Hurricanes have historically come in 15 to 20-year cycles of high and low frequency and this is the high-frequency part of the cycle, as demonstrated by the significant frequency and severity of hurricanes in 2004 and 2005. Fitch does not see any way that Florida can have both ‘availability and affordability’ of insurance in the long term under the current conditions.

“The benign season of 2006 may have given false hope to the state that the risk of hurricane losses has subsided.”

Fitch takes the view the proposed legislation, which has been passed by state legislators this week and is now awaiting being signed into law, suppresses homeowner insurance premiums in Florida where capacity to meet claims is already inadequate.

Far better, its says, would be for the state to allow competitive market forces to dictate insurance rates and to encourage risk mitigation measures, such as regulations to create stronger homes able to withstand hurricane-force winds.

Association of Bermuda Insurers and Reinsurers’ president Bradley Kading said Florida’s state-sponsored catastrophe funds have been operating since 1994 and have been “unfair” on the regular insurance providers because of the lower business expenses of state-sponsored funds and different capital loss rules.

He said: “The gamble they are taking is that Florida will not have a big storm and will be able to accumulate cash that will be able to pay claims (in future years).”

Mr. Kading said Florida raising its catastrophe fund cap to $32 billion, when it has bonds, he said, of $22 billion, equates to “a huge liability” and the suppressed insurance premiums removed the incentive to hurricane-proof homes.

Claire Wilkinson, a vice-president at the Insurance Information Institute, said: “The hurricane season of 2004/05 put the Florida ‘cat’ fund and Citizens corporation in a weak position with $4 billion deficit.

“What this legislation does is increase the exposure and the potential deficit in the future and it does not seem to do anything to encourage improvements to building codes or risk mitigation.

“The Institute has been trying to educate both sides on this issue. The current method for financing in Florida has been a good one. We want to see that all sides have a look at the long-term approach. This legislation is disappointing.”

Democrat senator Steven Geller, of Broward County, Florida, said: “There should be dramatic savings. Our biggest risk is what happens if we get hit before we build up enough capital.”

Vinay Misquith, of New York-based Credit Suisse Group, observed: “Although reinsurers like RenaissanceRe that write a significant amount of homeowners’ reinsurance in Florida would be the most negatively impacted, most reinsurers would be adversely affected.”

At market close last night shares in RenaissanceRe were down 11 cents at $52.66, Aspen Insurance were down 17 cents to $25.40, Axis Capital shares were 18 cents lower at $32.69, Endurance Specialty were seven cents lower at $34.43, Montpelier Re were two cents lower at $17.88 and XL Capital were lower by 49 cents at $68.62.

The Royal Gazette contacted all the individual reinsurance companies mentioned in this article but by press time had not received any comments relating to the impact of the Florida legislation.