FloodSmart Re Ltd. (Series 2022-1)

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FloodSmart Re Ltd. (Series 2022-1) – 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: $450m
  • Trigger type: Indemnity
  • Ratings: NR
  • Date of issue: Feb 2022

FloodSmart Re Ltd. (Series 2022-1) – Full details:

The U.S. Federal Emergency Management Agency (FEMA) has returned to the catastrophe bond market for what will be its fifth issuance of a FloodSmart Re transaction.

For 2022, FEMA’s FloodSmart Re Ltd. issuance vehicle is aiming to secure at least $325 million of additional reinsurance for the National Flood Insurance Program (NFIP).

As with all of FEMA’s previous FloodSmart Re catastrophe bonds for the NFIP, this new Series 2022-1 issuance will sit alongside the traditional reinsurance tower and the other cat bonds, as FEMA continues to fill out the tower with multi-year capital markets coverage alongside its annual one-year reinsurance renewal.

We understand from sources that FEMA’s special purpose insurer, FloodSmart Re Ltd., will issue three tranches of Series 2022-1 notes that will be sold to catastrophe bond funds and investors, with a goal of raising at least $325 million.

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 will then 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.

This 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.

As with all FloodSmart Re cat bonds, the reinsurance protection will cover some of the NFIP’s losses from major flood events caused by named storms, so tropical depressions, storms and hurricanes, while the protection will extend across the United States, Puerto Rico, U.S. Virgin Islands and D.C.

FloodSmart Re will issue a $200 million or larger Class A tranche of Series 2022-1 notes, that have an attachment point of $9 billion of losses to the NFIP, exhausting at $10 billion, and will have an initial expected loss of 4.25%.

The Class A tranche of notes are being offered to cat bond investors with coupon guidance in a range from 11% to 11.5%, we understand.

A $100 million Series 2022-1 tranche of Class B notes could attach at $7 billion of losses and cover a percentage up to $9 billion, so sitting directly beneath the Class A layer and having an initial expected loss of 5.48%.

The Class B tranche of notes are being marketed to investors within initial price guidance in a range from 13% to 13.75%.

A final, smaller $25 million Class C tranche of notes are lowest down and would sit beneath Class B, attaching at $6 billion of losses and exhausting at $7 billion, giving them an initial expected loss of 7.17%, we’re told.

The Class C notes are being offered to investors with coupon guidance in a range from 17% to 17.75%.

Update 1:

FEMA’s target for its new FloodSmart Re 2022-1 catastrophe bond has now been lifted to as much as $450 million.

The Class A tranche is now targeting between $300 million to $325 million, with pricing fixed at 11.25%.

The Series 2022-1 tranche of Class B notes remains at $100 million in size, with pricing fixed at the top-end, of 13.75%.

The final, smaller $25 million Class C tranche of notes have not changed in size either their pricing has been fixed at the top-end of 17.75%.

Update 2:

FEMA secured the upsized $450 million of reinsurance target for its latest catastrophe bond, while pricing was finalised at the fixed levels.

This leaves the FloodSmart Re 2022-1 cat bond structured as:

– Class A – $325 million in size, coupon of 11.25%.
– Class B – $100 million in size, coupon of 13.75%.
– Class C – $25 million in size, coupon of 17.75%.

After this new cat bond settles, FEMA will have secured an impressive $2.225 billion of collateralized reinsurance from the capital markets across five catastrophe bonds issued under the FloodSmart Re Ltd. program, since 2018.

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