FloodSmart Re Ltd. (Series 2020-1)

The U.S. Federal Emergency Management Agency (FEMA) has returned to the catastrophe bond market for its third transaction seeking flood reinsurance coverage from the capital market for its National Flood Insurance Program (NFIP).

The $300 million or greater FloodSmart Re Ltd. (Series 2020-1) cat bond will sit alongside traditional sources of reinsurance and FEMA’s two other FloodSmart Re catastrophe bonds from 2018 and 2019.

If successful with its latest issuance, FEMA will benefit from at least $1.1 billion of catastrophe bond backed flood reinsurance coverage after this deal is issued.

This new transaction will see special purpose insurer FloodSmart Re Ltd. issuing two tranches of notes that will be sold to catastrophe bond funds and investors and the proceeds used to collateralise retrocessional reinsurance agreements with the ceding reinsurer that is global player Hannover Re, using its Irish company Hannover Re (Ireland) DAC.

Hannover Re has played this intermediary ceding reinsurance role in all of FEMA’s NFIP flood cat bonds, helping the government agency to efficiently access the capital markets as a source of reinsurance protection.

Hannover Re will pass on the protection from FloodSmart Re through reinsurance agreements entered into with FEMA and the NFIP, the ultimate reinsured party and beneficiary of the flood reinsurance protection.

The deal is targeting $300 million of flood reinsurance protection for FEMA’s NFIP program, which will be provided on an indemnity trigger and per-occurrence basis, we’re told.

A lower risk Class A tranche targets a $200 million issuance, while a riskier $100 million Class B tranche of notes will sit beneath them.

Like the previous two FloodSmart Re cat bonds, the coverage FEMA is seeking will provide reinsurance protection for major flood loss events emanating from named storms, so tropical depressions, storms and hurricanes.

The coverage will be across the entire United States, Puerto Rico, U.S. Virgin Islands and D.C. and the deal will provide flood reinsurance to the NFIP across a three-year term.

We understand the $200 million of FloodSmart Re Series 2020-1 Class A notes will sit up alongside the higher layers of FEMA’s NFIP flood reinsurance, attaching at $9 billion of losses and exhausting at $10 billion, giving them an initial expected loss of 3.91%.

The Class A notes are being marketed to investors with coupon guidance in a range from 10.75% to 11.5%.

The smaller $100 million tranche of Series 2020-1 Class B notes that FloodSmart Re will issue will sit below the A’s, lower down in the NFIP reinsurance program, with an attachment point at $6 billion of losses and covering a percentage of losses up to $9 billion, which gives them an initial expected loss of 5.68%.

This tranche is offered to cat bond investors with coupon guidance in a range from 13.75% to 14.5%.

The pricing is close to the 2019 FloodSmart Re cat bond, although the Class A tranche attachment point is slightly higher and the Class B notes covers a smaller percentage of losses, over a more extended slice of the NFIP reinsurance program.

Update 1:

We now understand that the lower risk Class A tranche has a new target for between $200 million to as much as $300 million of notes issued, while the riskier Class B layer is still targeting the same $100 million.

The now $200 million to $300 million of FloodSmart Re Series 2020-1 Class A notes, which have an initial expected loss of 3.91%, were initially marketed to investors with coupon guidance in a range from 10.75% to 11.5%.

We’re now told the guidance for the potentially upsizing Class A tranche has been narrowed towards the upper end at 11% to 11.5%, as final allocations are sought.

The smaller, riskier and still $100 million tranche of Series 2020-1 Class B notes that FloodSmart Re, which have an initial expected loss of 5.68%, were at first offered to cat bond investors with coupon guidance in a range from 13.75% to 14.5%.

We’re now told the Class B layer pricing has been fixed at the upper-end of that range, at 14.5%.

Update 2:

FEMA’s third flood catastrophe bond has settled at the upsized $400 million.

The Class A tranche successfully secured the $300 million revised target and pricing for these notes was fixed at 11%, so the bottom of the revised coupon guidance range.

The Class B tranche remained $100 million in size, with coupon pricing of 14.5%.

Update – March 10th, 2023:

One tranche of the FloodSmart Re catastrophe bond program has had its maturity extended to allow for further development of the NFIP’s flood insurance losses from hurricane Ian.

The $100 million Class B tranche of Series 2020-1 cat bond notes issued by FloodSmart Re in February 2020 saw a partial redemption first, with the outstanding principal reduced by $80 million, so leaving just $20 million of the notes outstanding and then the maturity date extended to the end of February 2027.

Update – March 29th, 2023:

A further partial redemption was made of $10 million, leaving just $10 million still outstanding and extended till the end of February 2023.

Presumably this additional redemption will have been to return more capital to investors, as FEMA’s clarity over its eventual hurricane Ian loss exposure increases.