NFIP’s early Ida estimate suggests no reinsurance or cat bond losses

According to our sources, an early estimate of the National Flood Insurance Program’s (NFIP) losses from hurricane Ida suggests that its reinsurance program and catastrophe bonds are less likely to face any impact from the catastrophic event.

As we’d previously explained, the National Flood Insurance Program, which is administered by the U.S. Federal Emergency Management Agency (FEMA), came into focus immediately after hurricane Ida struck Louisiana in August.

But the focus on the NFIP’s reinsurance program and the FloodSmart Re catastrophe bonds that make up part of that, intensified after hurricane Ida’s remnants began to flood parts of the US northeast, including metropolitan areas like New York City.

As industry loss estimates rose, scrutiny of the NFIP reinsurance and FloodSmart Re cat bonds increased again, with some of the higher risk catastrophe bond tranches being marked down in the secondary market, as some cat bond fund managers and investors began to discount them on an elevated chance of losses being faced.,

Catastrophe risk modeller RMS put out an estimate of losses for the NFIP, encompassing both the initial Louisiana and surrounding states impacts of hurricane Ida and the damage further north, of between $3.8 billion and $6 billion.

As we explained, that was notable as the NFIP’s traditional reinsurance program, which was renewed in January 2021 at $1.153 billion in size, attaches at $4 billion of losses to the Program.

The $1.153 billion of flood reinsurance covers the NFIP for 9.43% of its flood insurance losses between $4 billion and $6 billion, 28.084% of losses between $6 billion and $8 billion, and 20.168% of losses between $8 billion and $10 billion.

The FloodSmart Re cat bonds don’t attach until the NFIP’s reinsurance appropriate claims reach $6 billion, so right at the upper-end of RMS’ estimate.

While the cat bond prices declined in the secondary market largely as the northeast flooding from Ida’s remnants and the rising industry loss estimates drove volatility in the market associated with these FloodSmart Re names and some other exposed cat bonds, that volatility subsided a few weeks ago after the NFIP put out an early claims estimate.

In fact, the FloodSmart Re cat bonds recovered some of their value in the secondary market after the NFIP’s initial estimate came out.

Sources told us this estimate was for hurricane Ida claims to only amount to between $1 billion to a maximum of $2 billion, which is lower than both the attachments of the reinsurance at $4 billion of losses and the FloodSmart Re cat bonds at $6 billion.

Of course, the NFIP continues to receive claims and we understand the market is expecting that the eventual NFIP loss will near or perhaps surpass that $2 billion level.

But that still puts it some way below the attachment point for the reinsurance program and a long-way below the attachment points of the FloodSmart Re cat bonds.

As a result, we’re told that the FloodSmart Re cat bonds should recover most of their lost value in the secondary market over the next few weeks.

These cat bonds traded relatively briskly in recent weeks, as some investors looked to shed what was seen as a potentially loss exposed position.

Those cat bond funds and investors that held their positions, or bought into the FloodSmart Re cat bonds at a lower price may be rewarded it seems.