FEMA’s $300m FloodSmart Re 2019 cat bond to price at top of guidance

Both tranches of FEMA’s second flood catastrophe bond are set to price at the top-end of initial guidance, as ILS investors demand a higher level of return from the $300 million FloodSmart Re Ltd. (Series 2019-1) cat bond.

The FloodSmart Re 2019-1 cat bond has not upsized though, we understand, as sources said it remains a $300 million issuance, split across a $250 million lower risk layer and a $50 million higher risk layer of the NFIP’s reinsurance program.

The U.S. Federal Emergency Management Agency’s (FEMA) returned to the insurance-linked securities (ILS) market in recent weeks for its second catastrophe bond issuance, as it looks to expand the participation of the capital markets in its reinsurance tower.

The deal was launched as a $300 million transaction, featuring a $250 million Class A tranche of Series 2019-1 notes that are lower risk, sitting higher up in the NFIP’s reinsurance tower, and a $50 million Class B tranche that sits below them, so would attach first.

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

FEMA has once again enlisted the support of German reinsurance giant Hannover Re to act as the ceding reinsurer for the cat bond transaction using an Irish domiciled entity.

The reinsurance coverage provided to the NFIP will be on an indemnity and per-occurrence basis and the new FloodSmart Re 2019 cat bond will protect FEMA against certain NFIP losses across the United States, Puerto Rico, U.S. Virgin Islands and D.C.

The $250 million of FloodSmart Re Series 2019-1 Class A notes will sit alongside the highest layer of FEMA’s NFIP reinsurance, attaching at $8 billion of losses and exhausting at $10 billion, giving them an initial expected loss of 4.15%.

The Class A notes were at first offered to investors with coupon guidance in a range from 10.25% to 11.25%, but we’re told this has now been fixed at the upper-end at 11.25%.

The smaller $50 million of Class B notes that FloodSmart Re will issue will sit alongside the second layer of the NFIP reinsurance program, so having an attachment point at $6 billion of losses and covering up to $8 billion, with an initial expected loss of 6.01%.

This tranche was launched to investors with coupon guidance in a range from 13.5% to 14.5%, and we understand this has now also been fixed at the higher end of initial guidance, at 14.5%.

Once again ILS investors have clearly demonstrated their desire for higher returns and to be compensated fully for providing capital to back catastrophe bonds in 2019, another sign that bodes well for the upcoming renewal season.

For FEMA, the catastrophe bond coverage helps to expand its reinsurance, bringing capital market investors into its reinsurance tower to complement the traditional coverage it also benefits from.

We understand that the FloodSmart Re Ltd. (Series 2019-1) catastrophe bond issuance will be completed next week for FEMA. You can read about this and details on over 580 other catastrophe bond transactions in the Artemis Deal Directory.

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