MIAMI, May 30 2006  (Reuters) - Florida's state-run insurers are close to tapped out after eight costly hurricanes in two years and are turning to bond markets to get ready for the upcoming hurricane season.

Together, the state's Citizens Property Insurance Co. and the Florida Hurricane Catastrophe Fund are planning to sell about $4.25 billion of bonds in June to ensure each has sufficient money on hand to meet possible claims.

The unprecedented string of storms in 2004 and 2005 caused property damage in Florida that cost insurers $30 billion and led to sharp, broad increases in insurance rates and widespread complaints from Florida homeowners about skyrocketing prices.

Private insurers in Florida such as Allstate Corp. (ALL.N: Quote, Profile, Research)> and State Farm Insurance are seeking residential rate hikes as high as 71 percent or are cutting policy-holders, while the state is pumping $715 million of tax money into Citizens Property Insurance to fund liquidity.

"We are going into the hurricane season with a low surplus because we paid it all out," said Justin Glover, spokesman for Citizens, the state's so-called insurer of last resort.

"Because we are a state entity, we can assess Floridians when we have a deficit. But that takes time and, if we have a storm, we need to have liquidity," he said.

Citizens paid out $5 billion in claims after the eight hurricanes. Federal forecasters last week predicted a busy 2006 Atlantic hurricane season with as many as 16 named storms, including four to six major hurricanes. Last year, there were an unprecedented 28 named storms in the Atlantic region.

Citizens, now the second largest home insurer in Florida with 850,000 policies, last week approved a $3.05 billion offering of taxable auction-rate bonds that should come to market in late June.

Citizens intends to invest the money from the bond sale until it is needed for claims, Glover said. In addition, Citizens expects premium payments from policy-holders of $2 billion this year.

The bond deal should go a long way to improving Citizens' ability to handle claims as high as $12 billion, or the payouts estimated for a 1-in-a-100-year storm season, according to Fitch Ratings. Before 2005's hurricane season, that estimate was just $7.6 billion for such extreme losses.

Florida's catastrophe fund, a reinsurer that mitigates massive payouts by private insurers in the state, is expected to come to the municipal market next week with a $1.22 billion bond offering through Lehman Brothers. It will be the fund's first bond sale.

The fund was created by the state legislature in the early 1990s after Hurricane Andrew, still the costliest single storm in Florida history, struck crowded south Florida. It is funded by premiums paid by insurers.

Insurers, which received more than $6 billion from the catastrophe fund after the 2004 and 2005 hurricane seasons, are entitled to payouts from the fund when hurricane-related claims cross over agreed totals.

"All they want to do is pay off the losses for the last few years and build up reserves for the coming years," said Robert Hartwig, chief economist for the Insurance Information Institute, an industry trade group.

Hartwig said some private insurers have concluded that the rates Florida allows for home insurance are too low for the risks involved and predicted that the client rolls for Citizens will soon top 1 million.

"Every state needs a market of last resort as a safety valve for times when there are major upheavals. But (Citizens) should not be operating as the major provider of coverage in the state," he said. "It puts private insurers at a disadvantage."

Citizens and the catastrophe fund are not required to maintain costly reserves and can borrow at favorable rates because of Florida's strong credit standing, he said.

Those advantages disguise the risks and true insurance costs of coastal housing in Florida and will raise government costs for all Florida taxpayers unless development practices are changed, Hartwig said.  

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