FloodSmart Re Ltd. (Series 2021-1)

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FloodSmart Re Ltd. (Series 2021-1) – At a glance:

  • Issuer: FloodSmart Re Ltd.
  • Cedent / sponsor: FEMA / NFIP via Hannover Re
  • Placement / structuring agent/s: GC 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: $575m
  • Trigger type: Indemnity
  • Ratings: NR
  • Date of issue: Feb 2021

FloodSmart Re Ltd. (Series 2021-1) – Full details:

This is the fourth catastrophe bond transaction to be sponsored by the U.S. U.S. Federal Emergency Management Agency (FEMA) to secure flood reinsurance coverage from the capital market for its National Flood Insurance Program (NFIP).

For this new issuance, special purpose insurer FloodSmart Re Ltd. will issue two tranches of Series 2021-1 notes that will be sold to catastrophe bond funds and investors.

The proceeds from the sale will be used to collateralise retrocessional reinsurance agreements, between FloodSmart Re and the ceding reinsurer that is global player Hannover Re.

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

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

The protection will, as with all the other FloodSmart Re catastrophe bonds, be across a three-year term and on an indemnity and per-occurrence trigger basis.

The reinsurance protection will be to cover some of the NFIP’s losses from major flood events specifically caused by named storms, so tropical depressions, storms and hurricanes, as in the other FloodSmart cat bonds, with the protection extending across the United States, Puerto Rico, U.S. Virgin Islands and D.C.

FloodSmart Re is targeting issuance of a currently $275 million Series 2021-1 Class A tranche of notes, which would attach at $7 billion of losses to the NFIP, exhausting at $9 billion, giving them an initial expected loss of 5.47%.

The Class A tranche of notes are being marketed to cat bond investors with coupon guidance in a range from 13.5% to 14.25%, we’re told.

The currently $75 million Series 2021-1 Class B tranche of notes would attach at $6 billion of losses and cover a percentage up to $7 billion, so sitting directly beneath the A tranche and having an initial expected loss of 7.23%.

The Class B tranche of notes are being marketed to investors within initial price guidance in a range from 17% to 17.75%.

The pricing on offer here has certainly increased over previous year’s FloodSmart Re cat bonds.

Update 1:

We understand the Class A layer is now targeted at between $400 million and $450 million in size, while the coupon guidance has fallen and narrowed to a range of 13% to 13.5%.

While, the targeted size for the Class B layer has been lifted to $100 million to $125 million, while the price guidance has again narrowed and fallen to 16.75% to 17%.

So, it looks like FEMA is on track to secure between $500 million and $575 million of reinsurance capacity from its latest trip to the capital markets to sponsor a catastrophe bond, with pricing at or below the initial guidance.

Update 2:

FEMA secured the upsized target of $575 million of reinsurance protection from its latest catastrophe bond.

The Class A tranche settled at $450 million in size, while the Class B settled at $125 million.

The pricing was eventually fixed at the bottom-end of already reduced guidance, with the Class A notes paying a coupon of 13% and the Class B notes a coupon of 16.75%.

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