The U.S. Federal Emergency Management Agency (FEMA) has now secured the $450 million upper-target for its new FloodSmart Re Ltd. (Series 2022-1) catastrophe bond, with the deal set to more than replace a maturing cat bond and lift the capital markets share of the National Flood Insurance Program’s (NFIP) reinsurance tower.
At the same time, the pricing for all three tranches of Series 2022-1 catastrophe bond notes being issued by FloodSmart Re have priced at the levels we reported last week, with the riskier two tranches pricing at the top-end of guidance.
Overall it’s another very successful trip to the catastrophe bond market for FEMA, as it will grow its flood reinsurance protection for the NFIP with this new issuance.
At $450 million in size, FEMA’s new FloodSmart Re 2022-1 cat bond will now more than replace the $300 million FloodSmart Re Ltd. (Series 2019-1) cat bond that matures in March.
As a result, the overall size of FEMA’s flood reinsurance program for the NFIP will increase to $2.471 billion after that maturity and for a short time sit at $2.771 billion, until that 2019 cat bond matures.
With the traditional reinsurance tower only $1.064 billion in size, as of this year’s renewal, the catastrophe bond market will extend its dominance as the larger source of reinsurance capacity for the NFIP.
As a result, cat bonds will provide the NFIP with $1.425 billion of flood reinsurance protection through this year’s named storm season.
The FloodSmart Re 2022-1 cat bond has now been finalised, with details remaining the same as at our last update.
The issuance will now provide FEMA’s NFIP with $450 million of reinsurance protection across a three-year term and on an indemnity and per-occurrence trigger basis.
The reinsurance will a proportion of NFIP 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.
The deal is now structured with a $325 million Class A tranche of Series 2022-1 notes, that upsized from $200 million while marketing thanks to investor demand.
The Class A notes will have an attachment point of $9 billion of losses to the NFIP, exhausting at $10 billion, with an initial expected loss of 4.25%. They were first offered to cat bond investors with coupon guidance in a range from 11% to 11.5%, but have now been priced at an 11.25% coupon.
The Series 2022-1 tranche of Class B notes remained at $100 million in size, with an attachment at $7 billion of losses and covering a percentage up to $9 billion, so sitting directly beneath the Class A layer, with an initial expected loss of 5.48%.
The Class B tranche of notes were first marketed to investors with initial price guidance in a range from 13% to 13.75%, but this was fixed at the top-end to pay investors a 13.75% coupon.
The last, smaller $25 million Class C tranche of notes will sit beneath Class B, attaching at $6 billion of losses and exhausting at $7 billion, giving them an initial expected loss of 7.17%.
The Class C notes were offered to investors with coupon guidance in a range from 17% to 17.75% and they were also priced at the top-end of guidance, with a 17.75% coupon.
This cat bond issuance has been a good example of discipline in the insurance-linked securities (ILS) market, as investors demanded a certain level of return for a less frequently seen flood risk bond, pushing pricing to the upper levels for the two riskier tranches, while even the lower risk layer priced within its original guidance.
Yet another sign that cat bond investors, while having a very strong appetite for new risk at this time will not allocate capital at any cost to risks they feel less confident about and continue to insist on adequate returns.
This latest catastrophe bond from FEMA will settle at the end of this week, we understand, after which 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.
You can read all about this new FloodSmart Re Ltd. (Series 2022-1) catastrophe bond and every other cat bond ever issued in our extensive Artemis Deal Directory.
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