FEMA plans new NFIP flood cat bond, seeks reinsurance transformer

The U.S. Federal Emergency Management Agency (FEMA) is planning to sponsor another FloodSmart Re catastrophe bond to provide flood reinsurance to the National Flood Insurance Program (NFIP) and is seeking proposals from potential reinsurance transformer partners.

FEMA has secured $1.775 billion of collateralized reinsurance from the capital markets across four catastrophe bonds issued under the FloodSmart Re Ltd. program since 2018.

It’s most recent and fourth cat bond deal, a $575 million FloodSmart Re Ltd. (Series 2021-1) issued in February 2021, will more than replace its soon to mature $500 million transaction from 2018, the FloodSmart Re 2018-1 cat bond.

Which means that going into the peak of this year’s Atlantic tropical storm and hurricane season, FEMA has $1.275 billion of flood reinsurance for the NFIP from the capital markets via its three still in-force catastrophe bonds.

That’s on top of the $1.153 billion of flood reinsurance that FEMA secured from 32 counterparties at the January 2021 renewals.

Giving the Agency over $2.4 billion of flood reinsurance in-force for the coming hurricane seasons peak.

It’s encouraging then to learn that FEMA is already beginning preliminary work to prepare for an issuance of new catastrophe bonds in its next fiscal year.

FEMA’s fiscal year runs in-line with the US government, beginning on October 1st and we’ve learned the Agency is planning to sponsor a new FloodSmart Re catastrophe bond during its fiscal year 2022, so anytime after that date.

FEMA is intending to procure reinsurance via a transformer partner that will technically sponsor the catastrophe bond on its behalf.

All of the previous FloodSmart Re cat bonds have been issued with German reinsurance giant Hannover Re taking on that role of transformer reinsurer.

But for the issuance in fiscal year 2022 (after October), FEMA is opening that role up to interest from other reinsurance firms that are able to act as a transformer to the capital markets for it.

As a result, FEMA has been running a procurement process for a transformer reinsurer, final tenders for which should have been submitted already, by July 16th.

FEMA has become aware of a number of entities that could support this, so is opening up the role of transformer reinsurer to parties interested in pitching for the work, we understand.

There are a number of requirements that make it seem likely there are only a handful of reinsurance firms that would apply for the role though, given that they must be a rated entity that has experience in issuing 144A catastrophe bonds as a transformer.

There aren’t many global reinsurance group’s that have done that before. In fact it’s likely restricted to incumbent partner Hannover Re, as well as Munich Re, Swiss Re and Allianz.

We’re not aware of SCOR or any other major, rated reinsurance firm acting as a transformer reinsurer for another party in a cat bond issuance, although there are plenty with experience from sponsoring catastrophe bonds issued on their own behalf.

The chosen transformer reinsurer also needs to be able to deploy significant limit to support the needs of FEMA and FEMA specifically noted that if market conditions, terms and pricing are supportive of its needs, it is committed to making a significant placement with its next catastrophe bond.

The next FEMA cat bond to mature will be the $300 million FloodSmart 2019 deal that matures in July 2022, so we’d imagine FEMA will at least look to replace that, possibly upsize on it.

It’s encouraging to see FEMA planning for more catastrophe bonds, which now make up a core and significant component of its growing flood reinsurance and risk transfer for the National Flood Insurance Program (NFIP).