The U.S. Federal Emergency Management Agency (FEMA) looks set to secure its largest FloodSmart Re catastrophe bond yet, as the target size for the FloodSmart Re Ltd. (Series 2021-1) transaction has been lifted to between $500 million and $575 million, we’re told.
FEMA returned to the catastrophe bond market in late January seeking at least a $350 million source of additional flood reinsurance coverage from the capital market for its National Flood Insurance Program (NFIP).
But with a $500 million FloodSmart Re Ltd. (Series 2018-1) cat bond due to mature before the start of this year’s U.S. named storm season, as we said at the time it always seemed likely FEMA would look to upsize on the initial $350 million target of the 2021 deal, if market conditions and investor appetite allowed.
Now, we understand from our market sources that the targeted size for FEMA’s fourth flood catastrophe bond has been lifted significantly higher, with the deal likely to complete offering somewhere between $500 million and $575 million of collateralized flood reinsurance protection.
At the same time, we’re told that investor demand has been high for the transaction and that FEMA will benefit by both tranches of notes pricing their coupons at or below the bottom-ends of their initial price guidance.
The reinsurance protection from the fourth FloodSmart Re cat bond will be used to cover some of the NFIP’s losses from major flood events specifically caused by named storms, so tropical depressions, storms and hurricanes, as in the other FloodSmart cat bonds, with the protection extending across the United States, Puerto Rico, U.S. Virgin Islands and D.C.
This reinsurance protection from FEMA’s new cat bond will be on an indemnity and per-occurrence basis, across a three-year term.
When the FloodSmart Re 2021 cat bond deal was first launched to investors, it featured a $275 million Series 2021-1 Class A tranche of notes, which would attach at $7 billion of losses to the NFIP, exhausting at $9 billion, with an initial expected loss of 5.47%. The Class A tranche was marketed to cat bond investors with coupon guidance in a range from 13.5% to 14.25%.
Now, we understand this Class A layer is targeted at between $400 million and $450 million in size, while the coupon guidance has fallen and narrowed to a range of 13% to 13.5%.
The second tranche had featured a proposed $75 million Series 2021-1 Class B tranche of notes, that would attach at $6 billion of losses and cover a percentage up to $7 billion, with an initial expected loss of 7.23%. The Class B tranche of notes were marketed to investors with initial price guidance in a range from 17% to 17.75%.
Now, we’re told that the targeted size for this Class B layer has been lifted to $100 million to $125 million, while the price guidance has again narrowed and fallen to 16.75% to 17%.
So, it looks like FEMA is on track to secure between $500 million and $575 million of reinsurance capacity from its latest trip to the capital markets to sponsor a catastrophe bond, with pricing set to be secured at or below the initial guidance ranges.
If this latest NFIP flood catastrophe bond hits $500 million in size or larger, as now seems assured, FEMA will benefit from at least $1.7 billion of catastrophe bond protection, for total flood reinsurance protection of over $2.95 billion including its traditional market program.
We understand pricing is due in the next day or two, while the deal will complete before the end of the month.
This could end up being FEMA’s largest flood catastrophe bond to-date and now looks set to at the least full-replace its maturing 2018 FloodSmart Re cat bond deal.