FEMA / NFIP return with $250m target FloodSmart Re 2023-1 catastrophe bond

The U.S. Federal Emergency Management Agency (FEMA) has returned to the catastrophe bond market and is aiming to secure at least $250 million of reinsurance protection for its National Flood Insurance Program (NFIP), through issuance of a FloodSmart Re Ltd. (Series 2023-1) cat bond.

This will be FEMA’s sixth issuance of a FloodSmart Re Ltd. catastrophe bond transaction, reflecting the importance of the capital markets as a source of reinsurance protection for the National Flood Insurance Program (NFIP).

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 a reminder, FEMA’s traditional reinsurance renewal for the NFIP for 2023 was much smaller than previous years, with the program tower shrinking to $502.5 million for this year. So the NFIP is in need to more reinsurance, to maintain that tower.

That was likely due to the fact FEMA’s NFIP is still developing its losses after hurricane Ian’s surge and flooding, which still have the potential to create some losses to the lowest layer of its reinsurance tower.

As a reminder, the FloodSmart Re cat bonds now look very unlikely to face any loss from Ian and their prices have recovered significantly in the secondary market.

So a return to the cat bond market, to see how much flood reinsurance protection can be secured from the capital markets, makes perfect sense, especially when traditional capacity was harder to come by.

Added to which, the NFIP’s $400 million FloodSmart Re Ltd. (Series 2020-1) cat bond matures before the end of this month, so there is that coverage to replace as well.

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%.

So the much higher spread environment in the catastrophe bond market is very apparent in the pricing indications for the new FloodSmart Re 2023-1 cat bond notes that are being issued, with much higher risk-adjusted pricing, it appears.

It’s good to see FEMA returning to cat bonds and it will be interesting to see what appetite investors have for the new deal, especially seeing as its cat bonds have not faced any losses from hurricane Ian to-date and now look unlikely to do so.

You can read all about this new FloodSmart Re Ltd. (Series 2023-1) catastrophe bond and every other cat bond ever issued in our extensive Artemis Deal Directory.