FEMA gets upsized $275m new NFIP cat bond, but reinsurance tower shrinking

The U.S. Federal Emergency Management Agency (FEMA) has now finalised its latest catastrophe bond for the National Flood Insurance Program (NFIP), securing an upsized $275 million of flood reinsurance from the FloodSmart Re Ltd. (Series 2023-1) deal, while the notes were priced at the low-end of guidance.

FEMA has now successfully priced its sixth issuance of a FloodSmart Re Ltd. catastrophe bond transaction, but the transaction is smaller than a soon to mature cat bond and so the shrinking of the NFIP reinsurance tower continues.

Recall, at the January reinsurance renewals, FEMA’s purchase for the NFIP for 2023 was far smaller than previous years, with the traditional buy shrinking to $502.5 million for this year.

Now, FEMA’s cat bond backed reinsurance for the NFIP is also shrinking, as the $400 million FloodSmart Re Ltd. (Series 2020-1) cat bond matures before the end of this month and this new deal will not fully-replace that cover.

View details on all of the FEMA / NFIP flood catastrophe bonds in our Deal Directory.

When this new deal was launched to investors three weeks ago, the target was to secure $250 million or more in flood reinsurance protection from the capital markets.

As we reported last week, the target size increased, but only slightly, with $275 million of reinsurance then sought for the NFIP.

We can now confirm that FEMA’s new FloodSmart Re 2023-1 catastrophe bond has been priced to provide that successfully upsized target of $275 million of flood reinsurance for the NFIP.

So, this FloodSmart Re 2023-1 cat bond will provide reinsurance to cover the NFIP against flood losses arising from US named storm events, across a three-year term, on an indemnity and per-occurrence trigger basis.

The reinsurance protection flows via Hannover Re again, as the global reinsurer acts as a front to the capital markets for the NFIP like all the previous FloodSmart Re cat bond deals.

Read more about the transaction here.

The Class A notes upsized by $25 million to provide $225 million of reinsurance, will attach at $8 billion of losses, having an initial base expected loss of 5.35%, priced at the lowest-end of initial guidance, with a spread of 16.25%.

The Class B notes stayed at $50 million in size, attaching at $7 billion of losses, with their initial base expected loss being 6.83% and again priced at the lowest-end of initial guidance, at 21.5%.

As we previously said, it’s likely FEMA has been optimising for pricing with this issuance, over any significant upsizing that may have required a higher spread to achieve.

But, the pricing is still significantly higher than the previous FloodSmart Re cat bonds, reflecting the higher priced global reinsurance market environment.

For comparison, at their issuance, the Class A notes from the FloodSmart Re Ltd. (Series 2021-1) deal, attached at $7 billion, with an expected loss of 5.47% and priced to pay a spread of 13%, while the Class B notes from last year’s FloodSmart Re Ltd. (Series 2022-1) deal attached at $7 billion, with an expected loss of 5.48% and paid a spread of 13.75%.

Pricing appears to be around 30% or more higher, as a result, although it’s always hard to directly compare given underlying exposure changes and model updates.

Once this new FloodSmart Re 2023-1 cat bond completes in early March, by which time the $400 million 2020-1 cat bond will have matured, FEMA’s reinsurance program for the NFIP will feature $1.3 billion of catastrophe bonds, out of a total reinsurance limit of just under $1.803 billion.

That’s down from $1.9275 billion at the start of the year, after the reinsurance renewal and much smaller than the NFIP reinsurance and cat bond tower was at its largest, back in 2021, when the government backed flood insurance program had $2.35 billion of reinsurance from its traditional cover and cat bonds.

Market conditions, as well as the still developing losses from hurricane Ian, have likely been contributors to the shrinking of the NFIP reinsurance tower, but FEMA remains engaged and keen to rebuild its protection, according to our sources.

You can read all about this new FloodSmart Re Ltd. (Series 2023-1) catastrophe bond and every other cat bond ever issued in our extensive Artemis Deal Directory.