FloodSmart Re Ltd. (Series 2023-1)

The U.S. Federal Emergency Management Agency (FEMA) is back in the catastrophe bond market for what will be its sixth FloodSmart Re Ltd. transaction.

For its first issuance of 2023, FEMA’s FloodSmart Re Ltd. special purpose insurer vehicle is aiming to secure at least $250 million of additional reinsurance for the National Flood Insurance Program (NFIP).

As with every one of FEMA’s previous FloodSmart Re catastrophe bonds for the NFIP, this new Series 2023-1 issuance will sit alongside the traditional reinsurance tower and its other cat bonds, as FEMA continues to build out its reinsurance tower with multi-year capital markets coverage, alongside its annual one-year traditional reinsurance renewal.

Sources told us that that FEMA’s special purpose insurer, FloodSmart Re Ltd., will issue two tranches of Series 2023-1 notes that will be sold to catastrophe bond funds and investors, with a goal of raising at least $250 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, which is once again fronting the investors for FEMA.

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

As with every other FloodSmart Re catastrophe bond, the reinsurance protection will cover the NFIP across a three-year term and on an indemnity and per-occurrence trigger basis, providing protection against flood losses arising from US named storm events.

A $200 million Class A tranche of notes will cover a percentage of losses from an attachment point of $8 billion of losses, up to $10 billion of losses, giving them an initial attachment probability of 6.25%, an initial base expected loss of 5.35% and these notes are being offered to investors with spread guidance in a range from 16.25% to 17.25%.

A $50 million tranche of Class B notes will cover a percentage of losses from an attachment point of $7 billion of losses, up to $8 billion of losses, giving them an initial attachment probability of 7.45%, an initial base expected loss of 6.83% and these notes are being offered to investors with spread guidance in a range from 21.5% to 22.5%.

For comparison, at issuance, the 2021 issued tranche of Class A notes from the FloodSmart Re Ltd. (Series 2021-1) deal, attached at $7 billion, with an expected loss of 5.47% and priced to pay a spread of 13%, while the Class B notes from last year’s FloodSmart Re Ltd. (Series 2022-1) deal attached at $7 billion, with an expected loss of 5.48% and paid a spread of 13.75%.

Update 1:

We’re told the target size for this latest FEMA / NFIP flood catastrophe bond has been lifted slightly, with up to $275 million of reinsurance now being sought, while pricing has dropped to the bottom of initial guidance for both tranches of notes.

The Class A tranche of notes are now being pitched as up to $225 million in size.

The Class A notes come with an initial base expected loss of 5.35% and were first offered to investors with spread guidance in a range from 16.25% to 17.25%, but we’re told that this guidance has been reduced to the lowest-end of 16.25%.

The Class B notes remain at $50 million in size, we’re told.

They come with an initial base expected loss of 6.83% and were first offered to investors with spread guidance in a range from 21.5% to 22.5%, but this has now also been reduced to the lowest-end of initial guidance, at 21.5%, we understand.

Update 2:

FEMA secured the upsized $275 million of flood reinsurance for the NFIP with this latest FloodSmart Re catastrophe bond.

At the same time, the two tranches of notes were priced at the bottom-end of their initial coupon guidance.

The Class A tranche of notes priced to provide $225 million of reinsurance, with a coupon of 16.25%.

The Class B notes continued to provide $50 million in reinsurance, while their coupon was finalised at 21.5%.