Will FHCF Survive 2024 – Part II

Last week, I discussed why the FHCF is still in trouble going into this wind season (see here). Today, I am back to conclude the analysis with a dive inside the numbers to illustrate why the math doesn’t work.

Simply put, the FHCF doesn’t charge insurers enough premium to cover expected losses and they assume they can mask over this by raising debt they can’t pay back.

While the FHCF has the ability to raise more money through assessments of non-homeowner’s insurers, this can only be used to pay off the debt.

They cannot issue assessments to rebuild their surplus. They can only build surplus through storm free years. However, nature conspires to defeat this plan.

Note, this is a lengthy note so if you want to skip all the details and get to the punchline, you can skip ahead to “Modeling the FHCF’s Cash Flows“.

Rebuilding Surplus

The main problem is FHCF does not have the surplus to meet its promise to pay $17B of potential claims to insurers. While they never fully funded this, historically they operated with ~$10B of surplus while punting the rest to potential debt issuance or premium assessments.

However, after Hurricane Ian, surplus fell to $3.7B, well below $10B. This left FHCF very vulnerable.

Fortunately, 2023 was a no storm year. This mean the $1.5B premium they collected from insurers fell to surplus. Additionally, they reduced their Ian loss from $10.0B to $9.5B.

So combined, surplus should have grown $2B to $5.7B. Yet, they are now reporting $6.9B of surplus!

Surplus Rollforward	$
Beginning Surplus	3.7B
2024 Premiums	1.5B
Hurricane Ian reserve release	0.5B
Mystery $ ???	1.2B
Total	6.9B

The Phantom $1.2B!

Where did this extra $1.2B come from? They don’t say. I have a suspicion, but I can’t confirm it. I believe they are counting their current debt in their “year end fund balance”, aka surplus.

They ended last year with $3.5B of debt. $1.25B of that is due 7/1/25. They have thus re-categorized that maturity to current and show $2.25B of debt (+ their new $1B issue from May) in their claims paying stack.

This is a prudent thing to do as that $1.25B isn’t really available anymore to pay claims since it needs to be returned to bondholders. However, this $1.25B is also the difference between what surplus should be and what they are reporting.

So what I think is happening is they have moved $1.25B from one hand (pre-event bond) to the other (year end fund balance).

Thus, it is included in the $17B potential claims paying resources, even though it is owed to bondholders in less than a year.

That’s a long way of saying that, if my interpretation is correct, $1.25 of the $6.9B goes away before next June. This will become important later.

So, let’s assume the real surplus is $5.7B. To get this back to $10B – which still is an aggressive position relative to $17B of obligations – requires storm free years in 24 (to end at $5.7B), 25, 26, & 27 as each claims free year adds another $1.5B of premium (assuming they can refinance the $1B debt maturity in ’27).

Is it possible? Sure, but remember, that’s a best case, not a base case.

What happens if we do get storms between now and then? That’s where it gets scary.

Managing Debt

As noted, FHCF cannot pay its obligations to insureds without relying on debt. Let’s do a quick review of their current debt and their potential future debt capacity.

FHCF has two categories of debt – pre-event and post-event. Pre-event is debt raised before hurricane season to improve liquidity. Post-event debt is issued after a large storm to pay any shortfall in claims paying resources.

FHCF has $4.5B of pre-event debt. $3.5B of this was issued in 2020 in 5, 7, and 10 year tranches. As mentioned, $1.25B comes due next year followed by $1B in ’27 and $1.25B in ’30. They also raised the $1B of 10 year debt in May that was referenced in Part I.

Amount	Maturity	Interest
$1.25B	7/1/25	1.258%
$1.0B	7/1/27	1.705%
$1.25B	7/1/30	2.154%
$1.0B	7/1/34	5.526%

Note, they count all the proceeds of this debt in their $10.2B of claims paying resources. In other words, if it is needed to pay claims, they have no means to pay bondholders back.

There is no current post-event debt. Post-event debt is issued from a position of weakness and should require a far larger coupon than pre-event bonds.

Post-event bonds can be paid back through assessments (more on that below). This does provide some extra protection for bondholders, but only if there are not subsequent large storms.

As noted in part I, a storm like Irma or Ian would wipe out FHCF’s claims paying resources and require post-event bonds.

There is no guarantee bond buyers will cooperate and buy post-event bonds, especially given the large issuance size relative to pre-event bonds.

Assessing the Role of Assessments

Defenders of the Florida insurance Ponzi scheme always fall back on assessments as the white knight that will bail out the system. Yet, they are not without drawbacks.

First, let’s cover how assessments would work. Effectively all lines of insurance ex-homeowners, worker’s comp, and medical malpractice are eligible for assessments. This is a premium base of $85B.

The maximum assessment for one storm is 6%/yr and the maximum over multiple storms is 10%. Much of the enthusiasm for assessments is that this is, on the surface, a big number – $5+B/yr.

However, there is one big catch. Assessments can’t be done arbitrarily. They require a post-event bond issuance in relation to an insured loss (search for “emergency assessments” in this document).

So FHCF can’t rebuild it’s surplus with an arbitrary assessment. It requires post-event bonds to be issued first. Further, the size of the assessment appears to be linked to the size of the bond raise.

While I don’t have the exact formula, it appears to equal the sum of the bond notional amount + the cumulative interest. In other words, an assessment must be used to service post-event debt.

This is a critical limitation. Assessments buy time for the fund to rebuild surplus after a large loss, but only if subsequent years are loss-free.

If later years produce more losses, well, you can do more assessments, but you’re still only paying back the new losses.

You never get to the point where FHCF can comfortably handle a future $17B loss on its own.

Political Risk

As for the viability of assessments, let’s recall what these are. They are a tax on policyholders who insure their cars, businesses, etc. to bail out home insurance companies who don’t want to buy enough private reinsurance.

Note, 40% of the assessable premium base is personal and commercial auto. If you’re a small business owner with five utility vans and two personal autos, a 6% assessment is a not insignificant amount.

Given complaints about the rise of insurance prices, particularly in auto lines, it’s hard to imagine this going over well politically.

I should also mention the assessments are tied to the debt issued. So if FHCF issues a 10 year post-event note, the assessment continues for 10 years, so even a 1%/yr assessment has a 10% cumulative cost to the insured.

If FHCF is at heightened risk of not paying back its debt anyway due to future storms, will the Governor risk political backlash to continue to provide below market reinsurance to home insurers?

Might it be easier politically to shut the whole program down?

Modeling the FHCF’s Cash Flows

Let’s look at what happens to the FHCF if we get another Ian or Irma sized storm this year that requires post-event debt and assessments.

I think the results will illustrate how much of a bind FHCF is in under their current capital structure.

We’re going to assume Hurricane Isaac creates losses of $10.2B, exactly wiping out all the surplus and existing debt.

Thus, FHCF would have 0 resources left to pay future claims and has nothing to pay off its $4.5B debt. They would seem to be bankrupt.

But, don’t worry, they can raise post-event debt!

OK, let’s see what happens if they do that. I’m going to assume they raise $10B total – $5B at YE ’24 and $5B at YE ’25, consistent with their projections.

I assume both tranches will be 10 year debt and they will have to pay 10% interest given the elevated risk of default.

The good news is they can now issue assessments to pay back this debt. Using their examples as a a guide, I estimate they could issue a 1% annual assessment for each $5B, so 2%/yr for 10 years.

This would raise $17B in total (see table below) given the $85B assessment base. Is that enough to restore the FHCF to health?

Well, that depends on a lot of things, primarily future losses. So let’s, for now, ignore losses (and premiums, in other words assume they cancel out).

What does the FHCF balance sheet look like in 2036 from using assessments to pay back post-event bonds?

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035	2036
Beginning surplus	5.7	-4.5	-4.15	-3.45	-2.75	-2.05	-1.35	-.65	.05	.75	1.45	2.15	2.5
Cat losses	-10.2
Assessments		.85	1.7	1.7	1.7	1.7	1.7	1.7	1.7	1.7	1.7	.85	0
Interest expense		-.5	-1	-1	-1	-1	-1	-1	-1	-1	-1	-.5	0
Ending surplus	-4.5	-4.15	-3.45	-2.75	-2.05	-1.35	-.65	.05	.75	1.45	2.15	2.5	2.5
Pre-event debt	4.5	3.25	3.25	2.25	2.25	2.25	1	1	1	1	0	0	0
Post-event debt		5	10	10	10	10	10	10	10	10	10	5	0
Debt outstanding	4.5	8.25	13.25	12.25	12.25	12.25	11	11	11	11	10	5	0
Total resources	0	4.1	9.8	9.5	10.2	10.9	10.35	11.05	11.75	12.45	12.15	7.5	2.5

The surplus, in this case, would grow from -$4.5B after the ’24 loss to +$2.5B by YE ’36 when the assessments expire and all the debt is paid off.

This is obviously inadequate as it’s still worse than the lows two years ago ($3.7B) after Hurricane Ian. So assessments alone are not enough to keep FHCF viable.

While they could raise more pre-event debt, rather than pay it all off like I model, it’s not going to change the conclusion. There is no ability to get anywhere near $17B of claims paying resources.

No Loss Scenario

Yes, but…I left out the annual premiums. That’s true, I did.

What happens if I put in $1.5B of annual premium for these twelve years (and no losses)? That’s $18B, so we get to $20.5B of surplus and everything is wonderful!

You just have to believe there will be no hurricanes for twelve years!!!

Wait, you don’t believe that?

OK, well if the fund wants to operate at $10B of surplus and raise pre-event debt beyond that, then they would be OK at $10.5B of cumulative losses (20.5 – 10.5 = 10).

Is it realistic to assume $10.5B of losses over 12 years? That’s <$900M/yr. Remember, FHCF told us their AAL is $1.1B. So no, it’s not realistic.

Also remember, I pointed out that $1.1B AAL is wildly optimistic and is more likely twice as much.

Realistic Loss Scenario

So what happens if we use a more realistic $2.2B of annual losses? Let’s take a look.

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033	2034	2035	2036
Beginning surplus	5.7	-4.5	-2.65	-2.65	-2.65	-2.65	-2.65	-2.65	-2.65	-2.65	-2.65	-2.65	-3.0
Premium		1.5	1.5	1.5	1.5	1.5	1.5	1.5	1.5	1.5	1.5	1.5	1.5
Cat losses	-10.2	0	-2.2	-2.2	-2.2	-2.2	-2.2	-2.2	-2.2	-2.2	-2.2	-2.2	-2.2
Assessments		.85	1.7	1.7	1.7	1.7	1.7	1.7	1.7	1.7	1.7	.85	0
Interest expense		-.5	-1	-1	-1	-1	-1	-1	-1	-1	-1	-.5	0
Ending surplus	–4.5	-2.65	-2.65	-2.65	-2.65	-2.65	-2.65	-2.65	-2.65	-2.65	-2.65	-3.0	-3.7
Pre-event debt	4.5	3.25	3.25	2.25	2.25	2.25	1	1	1	1	0	0	0
Post-event debt		5	10	10	10	10	10	10	10	10	10	5	0
Debt outstanding	4.5	8.25	13.25	12.25	12.25	12.25	11	11	11	11	10	5	0
Total resources	0	5.6	10.6	9.6	9.6	9.6	8.35	8.35	8.35	8.35	7.35	2	-3.7

Note, I even assumed 2025 was loss free as a goodwill gesture!

You’ll see beginning in 2026 surplus stays flat. The assessment + premium exactly equal the expected cat losses + interest. In other words, assessments just help FHCF tread water.

Once the assessments expire in the out years, surplus declines again and we end with -$3.7B of surplus.

Of course, there wouldn’t be precisely $2.2B of losses each year. If the cat losses are backloaded, the fund may appear to make progress for a while. If they happen early instead, it will be lights out sooner.

And sure, one response to those future losses might be another round of assessments, but you can see how this begins to resemble a dog chasing its tail.

No matter how many assessments you do and how much debt you raise, there is still no way to pay it back unless there are no cats for an extended period of time.

This means the FHCF is nothing more than a dice roll against the weather, except they are playing with loaded dice not in their favor.

What Have We Learned

I know I’ve thrown a lot of numbers and concepts out over the last two weeks, so let me try to simplify the conclusion.

The only thing that matters is will the FHCF collect more in premium than it pays out in losses.

That’s it. All the complications with debt raises and assessments and surplus levels and so on are just distractions. I’ve rebutted them because it’s necessary to conclusively prove that the FHCF has no practical path to survival.

However, they are not the story. The story is FHCF needs that AAL to be well under the $1.5B/yr of premium, even though historically it’s been above this.

While it’s possible this can happen, it’s unlikely. Thus, the main unknown is about when the FHCF will fail, not if.

Furthermore, it is important to note that the FHCF cannot compel bond buyers to buy its bonds. Thus, arguably, the greatest risk is the inability to sell bonds post the next storm.

Given all these facts, policymakers in Florida need a day after plan for what happens when the FHCF fails, either because of illiquidity (can’t issue bonds to pay current claims) or insolvency (exhausts all claims paying resources because it sells an underpriced product).

And if you’re an insurer in Florida, you better work on plan B for when FHCF goes away and you can no longer afford your reinsurance tower.

I’m happy to debate math with anyone who still is an unbeliever. There is plenty I left out to avoid this being four parts, but I can assure you that I’ve been through every resource FHCF makes available publicly.

If there is a way the FHCF can survive normal cat activity, I haven’t found it.