FEMA secures $400m of NFIP cat bond reinsurance at mixed pricing

The U.S. Federal Emergency Management Agency (FEMA) has now secured its upsized target of $400 million of catastrophe bond backed flood reinsurance coverage for the NFIP from its third capital markets issuance, the FloodSmart Re Ltd. (Series 2020-1) transaction.

FEMA’s third catastrophe bond will now provide the Agency with an investor backed source of reinsurance protection from the capital market for its National Flood Insurance Program (NFIP).

The issuance successfully increased in size by one-third, as cat bond investor demand helped FEMA lift the transaction from its initial $300 million up to $400 million by the time it priced and allocations were fixed.

At the same time as upsizing the pricing moved in opposite directions for the two tranches of FloodSmart Re 2020-1 catastrophe bond notes that were issued, with one tranche pricing towards the lower-end of initial guidance and the other pricing at the top-end.

The lower risk FloodSmart Re Series 2020-1 Class A tranche of notes grew by 50% to become a $300 million layer of protection

The Class A tranche had launched with an initial expected loss of 3.91% and coupon guidance in a range from 10.75% to 11.5% and now we’re told has been fixed at 11%, so below the mid-point.

The higher risk FloodSmart Re Series 2020-1 Class B tranche of notes stayed at $100 million in size.

The Class B notes had launched with an initial expected loss of 5.68%, and were offered to investors with price guidance in a range from 13.75% to 14.5%. The price settled at the top-end of that range, at 14.5% we’re told.

So the transaction will successfully add $400 million of reinsurance protection to FEMA’s NFIP flood program.

Once this deal comes on-risk later this week, FEMA will have $1.2 billion of catastrophe bond backed flood reinsurance for the NFIP, when this FloodSmart Re 2020-1 cat bond is added to the still in-force $500 million FloodSmart Re Ltd. (Series 2018-1) and the $300 million FloodSmart Re Ltd. (Series 2019-1).

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

So with this catastrophe bond and the other capital markets backed reinsurance coverage, FEMA’s flood reinsurance program for the NFIP has grown to $2.53 billion in size. Taking a significant amount of pressure off taxpayers for paying flood insurance claims when major losses strike the NFIP’s portfolio.

That’s quite a shift from a program that had zero reinsurance in place as recently as 2016. FEMA purchased its first proper reinsurance program for the NFIP at the January 2017 renewals.

The fact pricing was mixed between the two tranches of notes is not surprising, as cat bond investors clearly pushed for higher returns for the riskier tranche of notes and would not settle for the lower-end of pricing on the less risky tranche.

This is reflective of market conditions right now, suggesting healthier allocation and return seeking strategies among cat bond funds and investors.

We’ll update you as this new FloodSmart Re Ltd. (Series 2020-1) catastrophe bond issuance comes to market. You can read about this and details on over 650 other catastrophe bond transactions in the Artemis Deal Directory.