NEW YORK ? As Tropical Storm Ernesto heads towards Florida?s Southeast coast, property casualty insurers and reinsurers in the state are in better shape to handle the losses than they were last year, even if a big storm hits a major city there.

Ernesto is bearing down on the Southeast of the US exactly one year after Hurricane Katrina battered the Gulf Coast, killing over a 1,000 and leading to billions of dollars in losses for residents and their insurers. Lessons learned from devastating hurricanes in recent years have led major insurers to rethink their exposure to catastrophe prone areas such as Florida.

Since the 2005 hurricane season, Allstate Corp. (ALL), the largest publicly traded property casualty insurer in Florida and the US as a whole, has signed four new reinsurance agreements in Florida. The Northbrook, Ill., insurer has also transferred more than 120,000 of its personal property policies in the state to Royal Palm Insurance Co., a new property insurer in the state. After this hurricane season, Allstate, which received an 18.2% insurance rate increase in Florida in October, says it will no longer renew its smaller property lines such as landlord package policies, residential fire policies, and manufactured home policies.

Cliff Gallant, analyst at Keefe Bruyette and Woods Inc., noted that Allstate still has exposure but he said the steps it has taken to reduce the exposure plus a strong balance sheet leave the company well-prepared to handle even a major storm.

Gallant pointed to St. Paul Travelers Cos. (STA) as a primary insurer that has handled its catastrophe exposure through diversifying. ?Their homeowners book is smaller, and commercial lines business is very profitable,? he said. ?They had book value growth even with Katrina last year.?

In June, risk modelling company AIR Worldwide estimated that a category 5 hurricane that made landfall in Miami could result in insured losses of more than $130 billion. That would be about triple the amount of insured losses that occurred with Katrina, which did most of its damage in Louisiana, Mississippi and Alabama.

The biggest hurricane to hit Florida so far was 1992?s Hurricane Andrew, which caused $21.6 billion in damages. Last year, four major hurricanes hit Florida: Dennis, Katrina, Rita, and Wilma, which together resulted in around $10.5 billion in insured losses in Florida, according to the Florida Office of Insurance Regulation.

Adding to optimism about the ability of insurers to deal with big storm in Florida, residents of the the state have done better than average at taking steps to protect their property from hurricanes, according to a study done earlier in the summer by the Insurance Information Institute, an industry advocacy group.

With insurers reducing their exposure in Florida, the state-backed Citizens Insurance Company has taken on a lot of customers in recent years. That helps private insurers shift more of the financial risk to the state, which could pose a threat to state coffers.

?If there is a big hurricane, the state fund could be challenged,? said Gary Thompson, a partner with Washington D.C. law firm Reed Smith LLP. ?To the extent there is private insurance, you can be sure insurers will seek out any way they can to deny claims.?

He said taxpayers would end up being the ?insurer of last resort? if the state?s insurer fell short when it came to paying claims as a result of private market insurers cutting back coverage in the state.

The biggest homeowners and commercial insurers in Florida at the end of 2005 were: State Farm Mutual Automobile Insurance Co. with a 21% market share and $1.2 billion in direct premiums written, Allstate with an 8.9% market share and $500 million in direct premiums written, and Poe Financial Group with a 7.2% market share and $402 million in direct premiums written.

Nationwide Corp., a unit of Nationwide Financial Services Inc. (NFS), St. Paul Travellers, Chubb Corp. (CB), American International Group Inc. (AIG) and Hartford Financial Group Inc. (HIG) all had more than $100 million in direct premiums last year and at least a 2% market share.

As for reinsurers - the companies that provide insurance for insurance companies - Gallant said Bermuda reinsurers with a strong track record, such as Ace Ltd. (ACE) and PartnerRe Ltd. (PRE), will see big premium increases pass through to the bottom line assuming no major storms hit the U.S. in this hurricane season, which runs through November. He said benefits to shareholders could range from a special dividend to a major share repurchase programme.

Merrill Lynch analyst Jay A. Cohen said that reinsurers will benefit from ?substantially? higher fees this year and said it is unlikely they will be affected by Ernesto unless it strengthens to at least a Category 3 hurricane and hits a populated area.