FloodSmart Re Ltd. (Series 2019-1)

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FloodSmart Re Ltd. (Series 2019-1) – At a glance:

  • Issuer: FloodSmart Re Ltd. (Series 2019-1)
  • Cedent / sponsor: FEMA / NFIP via Hannover Re
  • Placement / structuring agent/s: Aon Securities is sole structuring agent and bookrunner.
  • Risk modelling / calculation agents etc: KatRisk LLC
  • Risks / perils covered: U.S. flood risk (from named storms)
  • Size: $300m
  • Trigger type: Indemnity
  • Ratings: NR
  • Date of issue: Apr 2019

FloodSmart Re Ltd. (Series 2019-1) – Full details:

This new FloodSmart Re 2019-1 catastrophe bond is the second cat bond transaction that will provide reinsurance protection to the National Flood Insurance Program (NFIP), which is administered by the U.S. Federal Emergency Management Agency (FEMA).

With its second cat bond for the NFIP, FEMA is seeking a $300 million or greater, three-year source of fully collateralized reinsurance protection against losses caused by flood events that have been triggered by named storms.

For its second flood cat bond, FEMA is once again using its Bermuda domiciled special purpose insurance vehicle FloodSmart Re Ltd.

Again, FEMA has enlisted the support of German reinsurance giant Hannover Re, which will be acting as the ceding reinsurer for the transaction through its Irish domiciled entity.

FloodSmart Re Ltd. will seek to issue two tranches of catastrophe bond notes, both of which will be sold to ILS investors with the proceeds used to collateralize the underlying retrocession agreements between it and Hannover Re. Hannover Re ultimately provides the reinsurance coverage to FEMA and its National Flood Insurance Program (NFIP).

This 2019 flood cat bond issuance features a $250 million Class A tranche of Series 2019-1 notes and a $50 million Class B tranche, which are the more risky layer of the issuance.

Both tranches of Flood Smart Re 2019-1 notes will be exposed over a three-year term to qualifying losses from flood events that are caused by named storms, the same covered peril as the 2018 flood cat bond deal.

Coverage is on an indemnity and per-occurrence basis and this cat bond will protect FEMA against certain NFIP losses across the United States, Puerto Rico, U.S. Virgin Islands and D.C., we understand.

Covering named storm related flood events only means this is protecting the NFIP against the true peak catastrophe events that it faces, as the largest flood insurance losses in its history have been tropical storm and hurricane linked.

This new FloodSmart 2019 cat bond will sit in a vertical slice of the higher layers of the NFIP’s reinsurance tower, alongside the 2018 cat bond and the two higher layers of FEMA’s 2019 flood reinsurance arrangements.

The proposed $250 million Class A tranche of FloodSmart Re Series 2019-1 notes will sit alongside the highest layer of FEMA’s NFIP reinsurance , we understand. These notes would attach at $8 billion of losses to the NFIP and exhaust at $10 billion, which we’re told give the notes an initial expected loss of 4.15% and attachment probability of 4.93%. This tranche is being offered to investors with coupon guidance in a range from 10.25% to 11.25%, sources said.

The smaller $50 million of Class B notes that FloodSmart Re is proposing to issue will sit alongside the second layer of the NFIP reinsurance program, so attaching at $6 billion of losses and covering up to $8 billion. That gives the notes an initial expected loss of 6.01% and attachment probability of 7.31%, while the coupon guidance is set in a range from 13.5% to 14.5%, we’re told.

In terms of pricing, these ranges are roughly similar to the 2018 cat bond, although have room for pricing to settle very slightly higher it appears.

Update 1:

FEMA’s new FloodSmart Re 2019 catastrophe bond has remained at $300 million in size, with both tranches staying static in dollar terms.

However, the pricing has now been fixed for both and the $250 million Class A tranche of notes (the less risky layer) is set to price at the upper-end of guidance at 11.25%, while the $50 million higher risk Class B tranche priced is also set to price at the top-end of guidance at 14.5%.

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