The U.S. Federal Emergency Management Agency (FEMA) has lifted its target for its third catastrophe bond, with the FloodSmart Re Ltd. (Series 2020-1) transaction now seeking up to $400 million of flood reinsurance protection from the capital market for its National Flood Insurance Program (NFIP).
FEMA returned to the capital markets with what will be its third NFIP flood catastrophe bond in late January.
At the time the arrangement was seeking $300 million of fully collateralised flood reinsurance protection from capital market investors, for a layer of the NFIP program that will see the new cat bond sitting alongside its previous two transactions, the $500 million FloodSmart Re Ltd. (Series 2018-1) and the $300 million FloodSmart Re Ltd. (Series 2019-1).
Now, we’re told that the target size has increased, with the overall issuance perhaps set to grow to as large as $400 million by its close.
The FloodSmart Re 2020-1 cat bond transaction will provide flood reinsurance protection for FEMA’s NFIP program on an indemnity trigger and per-occurrence basis, via a fronted arrangement that sees German reinsurance firm Hannover Re acting as an intermediating cedent.
When launched to cat bond investors, this FloodSmart Re cat bond featured a lower risk Class A tranche that targeted $200 million of flood reinsurance and a riskier $100 million Class B tranche of notes that would sit beneath them.
We now understand that the lower risk Class A tranche has a new target for between $200 million to as much as $300 million of notes issued, while the riskier Class B layer is still targeting the same $100 million.
The now $200 million to $300 million of FloodSmart Re Series 2020-1 Class A notes, which have an initial expected loss of 3.91%, were initially marketed to investors with coupon guidance in a range from 10.75% to 11.5%.
We’re now told the guidance for the potentially upsizing Class A tranche has been narrowed towards the upper end at 11% to 11.5%, as final allocations are sought.
The smaller, riskier and still $100 million tranche of Series 2020-1 Class B notes that FloodSmart Re, which have an initial expected loss of 5.68%, were at first offered to cat bond investors with coupon guidance in a range from 13.75% to 14.5%.
We’re now told the Class B layer pricing has been fixed at the upper-end of that range, at 14.5%.
So as a result, it looks like FEMA’s third trip to the catastrophe bond market will reflect the current pricing environment, with pricing moving higher during the deals marketing.
But with a chance of upsizing to $400 million, if cat bond investor appetite allows, once completed if it achieves that increased size, FEMA would then benefit from an impressive $1.2 billion of catastrophe bond backed flood reinsurance coverage after this deal is issued and closed.
At the January renewals this year FEMA secured $1.33 billion of traditional reinsurance limit to cover the National Flood Insurance Program (NFIP) for 2020.
If this third FloodSmart Re catastrophe bond completes at the upsized amount of $400 million, or even if it doesn’t, the cat bond backed reinsurance part of the program is set to almost match the traditional component.
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.