The U.S. Federal Emergency Management Agency (FEMA) has returned to the insurance-linked securities (ILS) market for its fourth catastrophe bond issuance, a currently $350 million FloodSmart Re Ltd. (Series 2021-1) transaction, seeking additional flood reinsurance coverage from the capital market for its National Flood Insurance Program (NFIP).
As with FEMA’s previous FloodSmart Re catastrophe bonds for the NFIP, the new Series 2021-1 issuance will sit alongside traditional sources or reinsurance and the other cat bonds, as FEMA continues to fill out the tower with multi-year capital markets deals alongside its single year reinsurance renewal.
FEMA already has $1.2 billion of catastrophe bond backed reinsurance coverage in force, from the $500 million FloodSmart Re Ltd. (Series 2018-1), the $300 million FloodSmart Re Ltd. (Series 2019-1) and the $400 million FloodSmart Re Ltd. (Series 2020-1) transactions.
The 2018 notes mature this year, so we could see the new 2021 transaction upsizing to replace that $500 million of reinsurance coverage that is due to roll-off before peak wind season.
The latest reinsurance renewal was completed again in January, as FEMA secured $1.153 billion of flood reinsurance from 32 counterparties, to cover 9.43% of the NFIP’s flood insurance losses between attachment of $4 billion and $6 billion, 28.084% of losses between $6 billion and $8 billion, and 20.168% of losses between $8 billion and $10 billion.
For this new issuance, we’re told that 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.
The new Series 2021-1 tranches will sit alongside some of the traditional reinsurance protection from the January renewal, as well as some of the protection afforded by the other FloodSmart Re cat bond deals.
If FEMA successfully secures this latest NFIP flood catastrophe bond at the targeted $350 million size or larger, it will benefit from at least $1.55 billion of catastrophe bond protection, for total flood reinsurance protection of over $2.7 billion including the traditional market protection.