FEMA’s second cat bond completes, takes NFIP flood reinsurance to $2.12bn

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The U.S. Federal Emergency Management Agency’s (FEMA) has expanded its flood reinsurance program for the National Flood Insurance Program (NFIP) to $2.12 billion in size, thanks to the successful completion of the $300 million FloodSmart Re Ltd. (Series 2019-1) cat bond issuance.

FEMA logoFEMA’s second catastrophe bond, the $300 million FloodSmart Re Ltd. completed earlier this week after just less than a month of marketing.

Thanks to this successful second U.S. flood risk cat bond, there is now $800 million of pure U.S. flood insurance risk in the catastrophe bond market, providing a new peril class for investors and ILS funds to allocate to.

The FloodSmart Re 2019-1 cat bond was launched in March and did not upsize, securing FEMA the $300 million of NFIP flood reinsurance it had been targeting.

However, the pricing did rise, with coupons settling at the upper-end of guidance, in-line with other price increases seen in catastrophe bonds and ILS as investors and ILS fund managers demand higher returns.

As a result, FEMA said that it will pay $32 million in premium for the first year of reinsurance coverage from its second catastrophe bond.

FEMA said it has entered into a three-year reinsurance agreement, effective April 17th 2019, with Hannover Re (Ireland) Designated Activity Company (DAC).

Reinsurance firm Hannover Re acted as a transformer for the catastrophe bond issuance, enabling FEMA to benefit from the coverage without having to face off to the special purpose insurer (SPI) FloodSmart Re itself.

$300 million of the NFIP’s financial risk was transferred to capital markets investors by sponsoring the issuance of the catastrophe bond, FEMA explained, with the agreement structured to cover, for a given flood event, 2.5% of losses between $6 billion and $8 billion, and 12.5% of losses between $8 billion and $10 billion.

The coverage is for flood losses linked to U.S. named storms only, as this is the true peak exposure that the NFIP holds.

“These capital market placements complement the NFIP’s existing traditional reinsurance coverage, allowing FEMA to grow the NFIP Reinsurance Program that protect against future flood losses,” FEMA explained.

Added to its first $500 million FloodSmart Re Ltd. (Series 2018-1) catastrophe bond, FEMA now benefits from $800 million of capital markets backed reinsurance coverage, which when added to its $1.32 billion of traditional reinsurance secured in January means it has $2.12 billion of in-force protection for the coming named storm and hurricane season, the most in its short history of utilising private market risk transfer.

Through the use of both traditional and capital markets sources of reinsurance, FEMA explained that, “the NFIP can reduce risk transfer costs, access additional market capacity, and further diversify its reinsurance partners.”

The move reduces FEMA’s need to borrow from the U.S. Treasury to pay claims for major named storm driven flood events, and the Agency said it is, “committed to further developing and maturing the NFIP Reinsurance Program in a manner that helps strengthen the financial framework of the NFIP, is beneficial to policyholders and taxpayers, and expands the role of the private markets in managing U.S. flood risk.”

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