The U.S. Federal Emergency Management Agency (FEMA) has now lifted its upper-target for its new FloodSmart Re Ltd. (Series 2022-1) catastrophe bond to seek as much as $450 million of reinsurance protection for its National Flood Insurance Program (NFIP).
This new FloodSmart Re 2022-1 catastrophe bond is the fifth in the series and now, as FEMA aims to upsize the issuance considerably, it looks set to expand the participation of the capital markets in the NFIP’s flood reinsurance tower once again.
When this cat bond deal was launched to investors at the end of January, FEMA was seeking $325 million of additional reinsurance protection for the NFIP from this FloodSmart Re 2022-1 issuance.
Now, we understand from sources that the target size has been lifted considerably with between $425 million and $450 million of reinsurance sought from capital market investors, as the lowest risk tranche of notes is set to upsize considerably.
At the same time, the pricing for all three tranches has been fixed and while the lower-risk and upsizing tranche is set to price down, the two higher-risk layers look set to price at the top-ends of their guidance, demonstrating the continued discipline of cat bond fund managers and investors in seeking differentiated pricing for different layers of risk, depending on their comfort levels in assuming them.
Having begun with a goal of raising at least $325 million, FEMA’s special purpose insurer, FloodSmart Re Ltd., is now aiming to issue up to $450 million of Series 2022-1 notes across three tranches that will be sold to catastrophe bond funds and investors.
The proceeds from the sale will be used to collateralise retrocessional reinsurance agreements, between FloodSmart Re and the ceding reinsurer, global player Hannover Re, which will then pass on the reinsurance protection from FloodSmart Re, through reinsurance agreements entered into with FEMA and its NFIP, the ultimate reinsured party and the beneficiary of the flood reinsurance protection.
This reinsurance protection will run across a three-year term and on an indemnity and per-occurrence trigger basis, covering some of the NFIP’s losses from major flood events caused by named storms, so tropical depressions, storms and hurricanes, while the protection will extend across the United States, Puerto Rico, U.S. Virgin Islands and D.C.
FloodSmart Re was aiming to issue a $200 million Class A tranche of Series 2022-1 notes, but we’re now told that this tranche is targeted at between $300 million to $325 million in size, a considerable increase but also not that surprising as this is the lower-risk layer.
The Class A notes have an attachment point of $9 billion of losses to the NFIP, exhausting at $10 billion, and will have an initial expected loss of 4.25%. They were first offered to cat bond investors with coupon guidance in a range from 11% to 11.5%, but we’re now told this has tightened and been fixed at 11.25%.
The Series 2022-1 tranche of Class B notes remains at $100 million in size, with an attachment at $7 billion of losses and covering a percentage up to $9 billion, so sitting directly beneath the Class A layer, with an initial expected loss of 5.48%.
The Class B tranche of notes were first marketed to investors with initial price guidance in a range from 13% to 13.75%, but this has now been fixed at the top-end, of 13.75%, we’re told.
The final, smaller $25 million Class C tranche of notes have not changed in size either and are riskiest, so will sit beneath Class B, attaching at $6 billion of losses and exhausting at $7 billion, giving them an initial expected loss of 7.17%.
The Class C notes were offered to investors with coupon guidance in a range from 17% to 17.75% and this has now been fixed at the top-end of 17.75% as well.
So cat bond investors have clearly shown that their appetite is more significant for the lower-risk layer here, while they are requiring a certain level of compensation for the higher risk tranches of notes, a healthy investor response to this arrangement.
FEMA has $2.321 billion of total flood reinsurance protection for the NFIP in-force at this time, with the catastrophe bond market the larger provider of protection across three in-force deals.
With a $300 million cat bond maturing in March, this new FloodSmart Re 2022-1 cat bond will more than replace it and so FEMA’s overall reinsurance protection will grow to between $2.446 billion and $2.471 billion, in now seems.
Out of that, traditional reinsurance is only $1.064 billion, as of this year’s renewal, so the catastrophe bond market remains the larger provider of protection to the NFIP at this time.