The remnants of hurricane Ida have continued to drop torrential rain along its path north east and its slow pace and heavy downpours have now flooded parts of New York, all of which is heightening the risk posed to FEMA’s catastrophe bonds and reinsurance tower for the National Flood Insurance Program.
As we explained yesterday in our analysis of catastrophe bonds that have seen secondary market price declines in the wake of hurricane Ida’s landfall and impacts in Louisiana and the surrounding region, the FloodSmart Re catastrophe bonds are among those considered potentially exposed.
The US Federal Emergency Management Agency (FEMA) has been procuring reinsurance for its National Flood Insurance Program (NFIP) for a few years now, both from traditional reinsurers and the capital markets using catastrophe bonds.
Currently, FEMA has $2.425 billion of reinsurance in-force, with $1.15 billion of traditional flood reinsurance secured from 32 counterparties at the January 2021 renewals.
In addition, there is another $1.275 billion of reinsurance from across three FloodSmart Re catastrophe bonds that are still in-force: the the $300 million FloodSmart Re Ltd. (Series 2019-1); the $400 million FloodSmart Re Ltd. (Series 2020-1); and most recent and largest $575 million FloodSmart Re Ltd. (Series 2021-1) cat bond issues.
As we explained yesterday, we’ve seen these flood cat bonds marked down by anything from a few percent to 12%, with 8% to 10% seemingly the main range of price reductions seen, on the broker pricing sheets we’ve seen.
It’s important to note that these were mark-to-market price reductions applied for the month-end pricing sheets, designed to factor in an elevated level of risk to these bonds, as the fallout from hurricane Ida is calculated.
As a result, they likely did not factor in the continued impacts from the remnants of hurricane Ida that we’re now seeing in the US north east states.
Now, hurricane Ida’s remnants have caused significant flooding in New York, with a state of emergency called by the authorities and footage showing subways, properties and businesses inundated.
Services have been suspended at Newark airport and across parts of the New York City Subway, while New Jersey, Connecticut and Pennsylvania are also areas that have experienced significant flooding all related to the remnants of hurricane Ida.
To give you an idea of how severe this flood event could be, in terms of damages, New York City has suffered its wettest hour on record, after over 80mm of rain fell in Central Park in the space of just 60 minutes.
That eclipses the previous record of 49mm that was set by tropical Storm Henri just weeks ago and the saturated ground from Henri has definitely contributed to the rapid occurrence of surface water and flash flooding with Ida’s remnants.
New York City mayor Bill de Blasio said, “I’m declaring a state of emergency in New York City tonight. We’re enduring a historic weather event tonight with record-breaking rain across the city, brutal flooding and dangerous conditions on our roads.”
Flooding has been extensive in parts of Manhattan and also Brooklyn, as well as the rest of New York state.
Being tropical storm or hurricane driven, the flooding caused by the remnants of Ida raises memories of other major events that have impacted FEMA, such as superstorm Sandy, which would have been a reinsurance event for the NFIP’s program according to stochastic modelling.
It’s impossible to forecast the potential NFIP ultimate insured flood loss from hurricane Ida, but it is now very clear that losses extend far beyond the immediate landfall state of Louisiana.
FEMA’s reinsurance protection attaches at $4 billion of losses, while the catastrophe bonds largely kick in above that, with the lowest down tranche having an attachment seemingly closer to $5.5 billion or $6 billion of losses we’re told after a reset.
Meaning that the first source of reinsurance capital to be impacted by any losses from hurricane Ida would be the traditional reinsurance protection, with cat bonds not paying out until flood insurance losses under the NFIP rose much higher.
The FloodSmart Re catastrophe bonds are all per-occurrence in nature, but FEMA has been smart to define a covered flood event as one that could encompass a particularly long period of time.
A flood event can run for 504 hours from a date of loss during the existence of a named storm and NFIP flood insurance losses from across that duration all contribute to the Program’s ultimate net loss, building towards the reinsurance and cat bond attachment points.
This means that, for the FloodSmart Re catastrophe bonds at least, it appears that all NFIP flood insurance losses from the entire duration of hurricane Ida and the impacts of its remnants, will be added up to get to the NFIP’s gross loss.
At this stage it’s not possible to tell how high this could reach and whether the NFIP’s reinsurance or cat bonds face a serious threat from Ida.
But, as the cat bond market was already discounting the FloodSmart Re cat bonds a little just on hurricane Ida’s impacts up to the end of August, it makes sense that these discounts could be extended further over the coming days, once these flood impacts from the storm in New York and surrounding states are factored in.