FloodSmart cat bond helps FEMA grow reinsurance lynchpin to $2.53bn

The U.S. Federal Emergency Management Agency (FEMA) successfully secured its latest and third catastrophe bond issuance, FloodSmart Re Ltd. (Series 2020-1), at the upsized target of $400 million, adding to its “lynchpin” flood reinsurance program.

With the addition of the latest catastrophe bond FEMA’s flood reinsurance coverage for the National Flood Insurance Program (NFIP) amounts to $2.53 billion for the 2020 named storm and hurricane season.

Of that total, FEMA has $1.33 billion of traditional reinsurance limit that it secured at the January renewals this year to cover the National Flood Insurance Program (NFIP) for 2020.

The capital markets are catching up though, as with the $500 million FloodSmart Re Ltd. (Series 2018-1) and the $300 million FloodSmart Re Ltd. (Series 2019-1) catastrophe bonds, plus this new $400 million FloodSmart Re 2020-1 transaction, FEMA has now secured an impressive $1.2 billion of multi-year reinsurance protection from the insurance-linked securities (ILS) market.

Commenting on the successful third visit to the capital markets FEMA’s Deputy Associate Administrator for Insurance and Mitigation David Maurstad, the senior executive in charge of the National Flood Insurance Program, said, “Reinsurance is a lynchpin to help strengthen the financial framework of the flood insurance program.

“By engaging capital markets, FEMA is able to access alternative capital and grow its 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.”

FEMA sees the use of reinsurance and catastrophe bonds as strengthening the financial framework of the NFIP and promoting private sector participation in flood-risk management.

For its third cat bond, FEMA entered into a three-year reinsurance agreement with Hannover Re (Ireland) Designated Activity Company, as the German reinsurer fronted the risk to the capital markets for the Agency.

Hannover Re then transferred $400 million of the program’s financial flood risk to qualified investors of capital markets, through the sale of catastrophe bond notes issued by FloodSmart Re Ltd.

FEMA said that it will pay a premium of $50.28 million for the first year of reinsurance coverage associated with this cat bond.

The reinsurance will provide FEMA with coverage for 3.33% of losses for any single flood event, where losses reach to between $6 billion and $9 billion, and 30% if that same flood event had losses that rose to between $9 billion and $10 billion.

FEMA said that these, “capital market placements complement the program’s existing traditional reinsurance coverage, allowing FEMA to grow the reinsurance program that protect against future flood losses.”

You can read full details on FEMA’s new FloodSmart Re Ltd. (Series 2020-1) catastrophe bond and information on more than 650 other catastrophe bond transactions in the Artemis Deal Directory.