FEMA returns for third NFIP flood cat bond, a $300m FloodSmart Re 2020

The U.S. Federal Emergency Management Agency (FEMA) is back in the catastrophe bond market with a $300 million FloodSmart Re Ltd. (Series 2020-1), which will be its third transaction seeking flood reinsurance coverage from the capital market for its National Flood Insurance Program (NFIP).

We understand from sources that the $300 million or greater FloodSmart Re Ltd. (Series 2020-1) cat bond will sit alongside traditional sources of reinsurance and FEMA’s two other FloodSmart Re catastrophe bonds from 2018 and 2019.

If successful with its latest issuance, FEMA will benefit from at least $1.1 billion of catastrophe bond backed flood reinsurance coverage after this deal is issued and closed.

FEMA’s previous cat bonds were the $500 million FloodSmart Re Ltd. (Series 2018-1) and the $300 million FloodSmart Re Ltd. (Series 2019-1).

This new transaction will see special purpose insurer FloodSmart Re Ltd. issuing two tranches of notes that will be sold to catastrophe bond funds and investors and the proceeds used to collateralise retrocessional reinsurance agreements with the ceding reinsurer that is global player Hannover Re, using its Irish company Hannover Re (Ireland) DAC.

Hannover Re has played this intermediary ceding reinsurance role in all of FEMA’s NFIP flood cat bonds, helping the government agency to efficiently access the capital markets as a source of reinsurance protection.

Hannover Re will pass on the protection from FloodSmart Re through reinsurance agreements entered into with FEMA and the NFIP, the ultimate reinsured party and beneficiary of the flood reinsurance protection.

The deal is targeting $300 million of flood reinsurance protection for FEMA’s NFIP program, which will be provided on an indemnity trigger and per-occurrence basis, we’re told.

A lower risk Class A tranche targets a $200 million issuance, while a riskier $100 million Class B tranche of notes will sit beneath them.

Like the previous two FloodSmart Re cat bonds, the coverage FEMA is seeking will provide reinsurance protection for major flood loss events emanating from named storms, so tropical depressions, storms and hurricanes.

The coverage will be across the entire United States, Puerto Rico, U.S. Virgin Islands and D.C. and the deal will provide flood reinsurance to the NFIP across a three-year term.

We understand the $200 million of FloodSmart Re Series 2020-1 Class A notes will sit up alongside the higher layers of FEMA’s NFIP flood reinsurance, attaching at $9 billion of losses and exhausting at $10 billion, giving them an initial expected loss of 3.91%.

The Class A notes are being marketed to investors with coupon guidance in a range from 10.75% to 11.5%.

The smaller $100 million tranche of Series 2020-1 Class B notes that FloodSmart Re will issue will sit below the A’s, lower down in the NFIP reinsurance program, with an attachment point at $6 billion of losses and covering a percentage of losses up to $9 billion, which gives them an initial expected loss of 5.68%.

This tranche is offered to cat bond investors with coupon guidance in a range from 13.75% to 14.5%.

The pricing is close to the 2019 FloodSmart Re cat bond, although the Class A tranche attachment point is slightly higher and the Class B notes covers a smaller percentage of losses, over a more extended slice of the NFIP reinsurance program.

As a result, it looks like there is a slight risk-adjusted uptick in coupon pricing for this new FloodSmart Re cat bond over the transaction just a year ago, reflecting the higher spread ambitions of cat bond investors in 2020.

The growing catastrophe bond backed reinsurance coverage helps FEMA to expand its NFIP reinsurance program and diversify the capital sources within it. It brings capital market investors into the FEMA NFIP flood reinsurance tower to complement the traditional reinsurer backed coverage it also has in-force.

At the January renewals this year FEMA secured $1.33 billion of traditional reinsurance limit to cover the National Flood Insurance Program (NFIP) for 2020.

Once this third FloodSmart Re catastrophe bond is completed, the cat bond backed reinsurance part of the program will be fast catching up to the traditional.

We understand that this new FloodSmart Re Ltd. (Series 2020-1) catastrophe bond issuance will be completed in February for FEMA. You can read about this and details on over 650 other catastrophe bond transactions in the Artemis Deal Directory.