Hurricane Bill steered clear of the U.S. coast, but property insurers can't relax yet.

Though the hurricane season has been quiet so far, the traditional peak lasts through the end of September. A big storm now, which remains possible even amid forecasts for a relatively mild hurricane season, could drain already-reduced insurance industry capital, and make it harder to raise more.

Insurers are already battling recession and poor financial markets. Customers have cut back on insurance coverage, hurting revenues and pricing. Insurer investment portfolios are earning less than in past years, while insurers are paying more for reinsurance to cover some of their own exposure. It all keeps insurers' profit margin thin.

A huge storm could upset this delicate balance. Big losses could help end a long downward trend in insurance pricing, but insurers could still be squeezed if the cost of replenishing capital is too high.

Then there's the case of Florida, where state-run Citizens Property Insurance Corp. dominates the personal lines market since Allstate Corp. (ALL) and other major homeowners insurers have reduced their business in the state. As a result, Florida, already suffering the effects of a battered housing market and weakened tourism, could be particularly vulnerable to major losses if storms are big.

This is a different scenario than in late August 2005, when insurers were hit with more than $40 billion in insured losses from Hurricane Katrina. They minimized the financial impact by raising prices sharply, buying more reinsurance to spread their risk and cutting back coverage in some storm-exposed areas. It could be tougher to do that successfully this year.

Rating agencies are stepping up their scrutiny of insurers, which makes their situation more difficult, said William Lonchar, vice president and Atlanta operations manager for FM Global, a commercial property insurer that covers many storm-exposed properties. You get into this 'cash is king'" mindset, he said, adding "the increased scrutiny will drive up the amount you need to have."

Share prices of insurers covered by research firm Fox-Pitt, Kelton are down about 14% in the past year, with concern over weak insurance prices a major factor holding back shares. "Year to date lackluster performance of the stocks has not been helped by the anticipation of cat(astrophe) season," the firm said in a recent report.

John DeMartini, executive vice president and catastrophe management practice leader with Towers Perrin's Reinsurance brokerage business, estimates that insurers can handle one "significant event" on the scale of Hurricane Katrina without too much difficulty.

"We run into challenges with multiple events," such as what occurred in the 2004 and 2005 seasons, which each had four big storms, he said. A scenario of multiple storms would, DeMartini said, have an impact on pricing and on reinsurance capacity.

One bright spot is that the U.S. storm season has gotten off to its slowest start since 1992.

Steve Bowen, a meteorologist with Impact Forecasting LLC, a subsidiary of insurance broker Aon Corp. (AOC), said the so-called El Nino weather phenomenon developed in the Pacific Ocean in June, which usually reduces the severity of the Atlantic hurricane season.

But the overall incidence of natural catastrophes seems to be rising, especially for energy installations in the Gulf, said Anthony Carroll, executive vice president for global energy and property at Liberty International Underwriters, a unit of insurer Liberty Mutual Group.

That's bad news for insurers and the energy industry: "If Hurricane Bill had turned into the Gulf, it could have had a significant impact on the industry," he said.

-By Lavonne Kuykendall, Dow Jones Newswires; (312) 750 4141; lavonne.kuykendall@dowjones.com