McCarty asserted that if companies get private reinsurance backing, state regulators take that as a sign that a company can cover its claims.

"It speaks volumes as to what they believe is a viable enterprise," said McCarty. "It would be imprudent for me to substitute my judgment. I do not run the companies, we regulate the companies."

However, what is undeniable is that McCarty has changed his message to state officials in the last year as to the health of the Florida market.

When state legislators sent Crist a bill last year to deregulate insurance rates, McCarty talked glowingly of how much capital was flowing in the state and said that recent reforms appeared to be working. Crist vetoed the bill.

By last fall — and again this March — McCarty was more circumspect, saying that changes were needed to help the overall financial status of insurers in the state.

"The marketplace in Florida remains with a lot of challenges," said McCarty.

Companies Lost Surplus

Data collected by the Florida Office of Insurance Regulation (OIR) and reported at the Cabinet meeting revealed that at the end of 2009 there were 60 companies showing a reduction in surplus, compared to 144 companies that declared surplus gains.

However, a majority of companies turned in data that also showed they had underwriting losses in the previous year: 81 companies reported underwriting gains, while 100 companies posted underwriting losses.

Citizens Property Insurance Corp., the state-created insurer with roughly 1 million policyholders, reported a $789 million gain and added $822 million to its surplus. By contrast, the second largest insurer in the state, State Farm Florida, was among those with some of the worst numbers. The carrier reported underwriting losses of nearly $464 million and a loss of $241 million in surplus. State Farm threatened to pull out of the state until it got an agreement letting it raise rates and shed 125,000 policies.

McCarty explained the discrepancy between the surplus and underwriting numbers by saying that some companies put additional money into their surplus accounts either on their own or at the request of state regulators.

McCarty placed part of the blame for insurers struggling in Florida on the overall national economic climate. However, he noted that interviews with company officials also led him to conclude that several other factors continue to reduce the bottom line of insurers. He cited replacement costs paid by insurers, an uptick in fraudulent claims, increased reinsurance costs, sinkhole losses, and the implementation of wind mitigation discounts to policyholders. He said a carrier survey conducted by his office in the last few months found that there have been many reopened claims that were refiled three, four and five years after the hurricanes, and many of these claims were made with the help of public adjusters.

McCarty also conceded that some insurers may be sending money to affiliated companies improperly. One newspaper report found that many companies were using managing general agents to run day-to-day operations, raising questions as to whether insurers were paying inflated overhead costs through these companies. McCarty said that his office is not required to be alerted about payments made "upstream" to these affiliated companies.

Attorney General Bill McCollum said he was very concerned about this practice, and it appeared to him that it was it was area "ripe for fraud." McCarty responded by saying his office was already talking to legislative leaders like Senate President Jeff Atwater about forcing insurers to give notice to state regulators whenever they transfer money to an affiliated company. However, he added that the state should not be too "heavy handed" because that could scare away new capital.

Problems Have Been Several Years in the Making

Robert Ritchie, president and CEO of American Integrity Insurance Group, agreed with McCarty's assessment of the problems in the Florida marketplace.

"There's been a confluence of events; there is not one single event," said Ritchie, whose Tampa-based company has more than 87,000 policyholders in Florida. "It's been building up for three years. I think the commissioner is doing the right thing."

Three years ago, Florida lawmakers put in place measures that were intended to force insurance rates downward by trying to expand the amount of reinsurance available to private carriers. However, in the last year lawmakers have reeled that back in amid concerns that the state has taken on too much financial risk.

Even without storms, insurers say they need rate hikes. McCarty said the combination of the different factors affecting insurers solvency is why his office is backing legislation during the 2010 session that would give insurers more leeway in dealing with mitigation discounts, as well as a measure that would put a three-year limit on when homeowners can file a hurricane claim.

Chief Financial Officer Alex Sink — who has clashed with McCarty in the past over how he has run the OIR — said she was concerned that insurers overall in Florida remain in a "somewhat precarious" situation. She also noted that she was glad that McCarty is finally taking notice of some of the ongoing problems.