The U.S. Federal Emergency Management Agency (FEMA) will be delighted with the outcome of its latest visit to the catastrophe bond market, as its FloodSmart Re Ltd. (Series 2021-1) issuance will now secure the upsized target of $575 million of reinsurance protection, while pricing has been fixed at the bottom of an already reduced range.
FEMA returned to the catastrophe bond market in late January seeking at least a $350 million source of additional flood reinsurance coverage from the capital market for its National Flood Insurance Program (NFIP).
But with a $500 million FloodSmart Re Ltd. (Series 2018-1) cat bond due to mature before the start of this year’s U.S. named storm season, as we said at the time it always seemed likely FEMA would look to upsize on the initial $350 million target of the 2021 deal, if market conditions and investor appetite allowed.
As we were first to report earlier this week, the targeted size lifted for this latest FloodSmart Re cat bond issuance, with FEMA setting its sights on between $500 million and $575 million of collateralized flood reinsurance protection.
At the same time the price guidance for where the two tranches coupons would sit were reduced significantly and now we’re told, this pricing has been fixed at the bottom-end of the already reduced below initial guidance ranges.
So FEMA will now secure $575 million of flood reinsurance protection from its fourth FloodSmart Re cat bond, sources have told us, making this its largest capital markets reinsurance issuance to-date.
The cat bond will cover $575 million of the National Flood Insurance Program’s (NFIP) losses caused by named storm events, 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.
The $575 million of reinsurance protection from FEMA’s new cat bond will be on an indemnity and per-occurrence basis, across a three-year term.
The FloodSmart Re 2021 cat bond deal was first marketed to ILS investors with a $275 million Series 2021-1 Class A tranche of notes, attaching at $7 billion of losses to the NFIP, exhausting at $9 billion, and with an initial expected loss of 5.47%.
In terms of size, the target lifted to $400 million to $450 million of reinsurance protection from these Class A notes and we’re told FEMA has now secured the top-end size of $450 million from this layer.
The Class A tranche was offered to cat bond investors with initial coupon guidance in a range from 13.5% to 14.25%, but that was then lowered to 13% to 13.5% and now, we’re told, this has been fixed at the low-end of a 13% coupon.
The second tranche at first featured a $75 million Series 2021-1 Class B tranche of notes,attaching at $6 billion of losses and covering a percentage up to $7 billion, with an initial expected loss of 7.23%.
The proposed size rose to between $100 million and $125 million and we’re now told this has been fixed at the top-end, of $125 million for the Class B notes.
The Class B tranche was initially marketed to investors with price guidance in a range from 17% to 17.75%, but that subsequently fell to 16.75% to 17% and we’re told has now been fixed at the lower-end at 16.75%.
While the pricing has dropped significantly during the marketing of this catastrophe bond, indicative of investor demand for the notes (as is the upsizing), the prices still look higher on a risk-adjusted basis than FEMA’s previous FloodSmart Re cat bond, so reflect the broader firming of reinsurance market pricing.
So this 2021-1 transaction is now FEMA’s largest flood catastrophe bond to-date, more than replacing its maturing 2018 FloodSmart Re cat bond deal that was $500m in size.
FEMA secured $1.153 billion of flood reinsurance from 32 counterparties at the January 2021 renewals.
At this time, FEMA still has $1.2 billion of catastrophe bond coverage in force as well, across the 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.
But with the 2018 cat bond set to mature at the end of July 2020, the coverage will drop at this stage, which is where this new cat bond comes in with its $575 million of reinsurance protection for the NFIP.
So the NFIP’s reinsurance program is currently around $2.35 billion in size and after this new cat bond completes that will jump to a new high at $2.925 billion, but then fall back to $2.425 billion for the majority of the 2021 US hurricane season, which is when these cat bonds are on-risk to named storm related flood loss events.
It’s encouraging to see FEMA continue its strong relationship with the catastrophe bond market and cat bonds continue to play a key role in its flood reinsurance arrangements for the NFIP.