The U.S. Federal Emergency Management Agency (FEMA) is back in the catastrophe bond market again, seeking to secure at least $325 million of additional reinsurance protection for its National Flood Insurance Program (NFIP) through a FloodSmart Re Ltd. (Series 2022-1) issuance, which will be FEMA’s fifth cat bond.
We explained back last July that FEMA was exploring the issuance of a new catastrophe bond within its 2022 fiscal year, which began October 1st and that it was also inviting pitches for a new reinsurance transformer partner.
All of the FloodSmart Re catastrophe bonds had been issued with the support of German reinsurer Hannover Re, fronting the risk for the capital markets and making it simpler for FEMA to access investors more directly for flood reinsurance to cover the NFIP’s liabilities.
With this new FloodSmart Re 2022-1 catastrophe bond, Hannover Re is again the reinsurance partner, acting as a transformer to enable the smooth transfer of flood risk to the capital markets, so it seems the company was successful in retaining this role.
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.
At the recent January 2022 reinsurance renewals, FEMA renewed the National Flood Insurance Program’s (NFIP) traditional reinsurance tower at $1.064 billion in size for 2022, a slight downsizing on the prior year.
There are still three FloodSmart Re catastrophe bonds in-force at this time, although the $300 million FloodSmart Re Ltd. (Series 2019-1) transaction matures this March.
Hence, this 2022 issuance looks targeted to at least replace the maturing cover, which could see FEMA’s overall reinsurance protection increasing this year.
FEMA has $2.321 billion of total flood reinsurance protection for the NFIP at this time, with the catastrophe bond market the larger provider of protection across the three in-force deals.
It looks like this will persist through 2022, with cat bonds providing more protection to the NFIP than traditional reinsurance, as long as this new FloodSmart Re 2022 hits its target.
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%.
Price guidance is fairly well-aligned with where the 2021 cat bond issuance settled and as a result we’d imagine FEMA will not have too much trouble securing the necessary capital markets backed reinsurance protection from its fifth catastrophe bond deal.
It’s good to see FEMA back in the cat bond market in 2022, as the Agency continues to place the capital markets at the heart of its reinsurance tower.
It will be interesting to see whether FEMA looks to upsize on this transaction, if investor appetite allows, as that could see the ILS market’s share of the NFIP reinsurance tower growing again.