The U.S. Federal Emergency Management Agency (FEMA) has now secured its $500 million of reinsurance from the capital markets through its first flood catastrophe bond issuance, the FloodSmart Re Ltd. (Series 2018-1) transaction, and more than 35 ILS investors and ILS funds have backed the deal.
The FloodSmart Re 2018-1 deal is now the first catastrophe bond to solely provide reinsurance coverage for flood risks and also the first visit to the capital markets for flood reinsurance for FEMA and the NFIP.
Two tranches of notes were sold to ILS funds and ILS investors in order to collateralize underlying reinsurance agreements covering a portion of the NFIP’s U.S. flood exposure, with the coverage more specifically being for a portion of the NFIP’s exposure to flood events directly caused by U.S. named storms (rainfall and storm surge related), on a per-occurrence and indemnity basis.
As we reported in mid-July, the transaction launched with a target for $275 million of reinsurance coverage for the NFIP’s exposure, across the two tranches of FloodSmart Re 2018 cat bond notes.
Investor demand was strong though and the transaction upsized to $500 million, as we reported just over a week ago.
Now, the FloodSmart Re cat bond issuance has been completed at the $500 million, with FEMA announcing, “For the first time, FEMA has secured reinsurance directly backed by capital markets investors, continuing efforts to better manage the program’s financial risk”
It’s important for FEMA to look to all sources of available reinsurance capital, given the amount of exposure it carries and the need to diversify that out into the private markets.
“Reinsurance is a lynchpin to help strengthen the financial framework of the NFIP,” explained David Maurstad, chief executive of the National Flood Insurance Program. “Engaging capital markets was the logical next step in maturing the NFIP Reinsurance Program in a way that benefits policyholders and taxpayers, and expands the role of the private markets in managing flood risk in the United States.”
The Floodsmart Re transaction was effected with the assistance of reinsurance giant Hannover Re, which acted as a transformer to interface with the issuing vehicle and the capital market investors.
Hannover Re, through its Hannover Re (Ireland) Designated Activity Company (DAC), transferred the $500 million of NFIP flood exposure to capital markets investors through the sponsorship of the FloodSmart Re catastrophe bond.
FEMA said, “This placement complements the NFIP’s existing traditional reinsurance coverage for calendar year 2018.”
The cat bond, which is structured into two tranches, provides FEMA with reinsurance coverage for 3.5% of its losses between an attachment point of $5 billion and exhaustion of $10 billion through the riskier $175 million tranche of Class B notes, and 13% of its losses between $7.5 billion and $10 billion through a $325 million tranche of Class A notes.
FEMA said that it will pay $62 million in premium for the first year of coverage, with the cat bond term running for three years from August 1st 2018 to July 31st 2021.
Added to FEMA’s January 2018 procurement of $1.46 billion of traditional reinsurance coverage from 28 reinsurance companies, the Agency has now transferred $1.96 billion of the NFIP’s flood risk to private markets.
“By engaging both the traditional reinsurance markets and the capital markets, the NFIP can reduce risk transfer costs, access greater market capacity, and further diversify its risk transfer partners,” FEMA said.
The catastrophe bond is multi-year in nature though, adding more benefits for FEMA in terms of fixed costs across the three-year term.
It’s to be hoped that FEMA will look to the capital markets for further FloodSmart Re Ltd. catastrophe bond issues, as it looks to bring more private capital into its reinsurance tower.
The ILS fund and investor community provided strong support for the transaction, helping it to upsize and oversubscribed the deal.
Cory Anger, Global Head of ILS Origination and Structuring at GC Securities, commented, “More than 35 capital markets investors provided fully-collateralized protection to FEMA/NFIP on the landmark and first-ever indemnity-triggered catastrophe bond (FloodSmart Re’s USD 500 million Series 2018-1 Notes) exposed to flood risk arising from tropical cyclones.
“We are honored to have assisted FEMA/NFIP in building a capital agnostic risk transfer program that now delivers innovative catastrophe bond protection from private capital sources in support of its existing cornerstone reinsurance placements.”
Other parties that assisted in the successful landmark flood cat bond issuance included specialist flood focused catastrophe risk modelling firm KatRisk LLC, Aon’s Reinsurance Solutions division that provided advisory and Aon Securities which served as joint bookrunner for the transaction.