Terms favourable for new $275m NFIP cat bond despite tough market: FEMA’s Maurstad

The U.S. Federal Emergency Management Agency (FEMA) has hailed the successful completion of its latest catastrophe bond despite the difficult market environment, after the FloodSmart Re Ltd. (Series 2023-1) deal secured it $275 million of flood reinsurance for the NFIP.

FEMA said that the successful placement of its sixth catastrophe bond shows how it continues to “engage reinsurance markets to help strengthen the financial framework of the National Flood Insurance Program and promote private sector participation in flood-risk management.”

Details of all FloodSmart Re catastrophe bonds sponsored by FEMA can be found in our Deal Directory.

FEMA said that the agency transferred $275 million of the NFIP’s financial risk to qualified investors in the capital markets through the sponsorship of the latest catastrophe bonds.

As with all of the other FloodSmart Re cat bond deals, FEMA has again entered into three-year reinsurance agreements with Hannover Re (Ireland) Designated Activity Company, as global reinsurer Hannover Re continues to front the capital markets for it.

The agency noted that reinsurance helps to lower the flood program’s need to take on additional debt in order to pay claims, should a major named storm linked flood event occur.

As a result, the engagement with reinsurance and capital markets helps to make the NFIP a more financially sound program that benefits policyholders and taxpayers alike, while this financial risk transfer helps to further stabilise the program, FEMA explained.

For the 2023 US hurricane season, FEMA will now have a total reinsurance limit available of $1.8 billion.

That breaks down into $1.3 billion of catastrophe bonds, from the $575 million FloodSmart Re Ltd. (Series 2021-1), $450 million FloodSmart Re Ltd. (Series 2022-1) and this latest and just placed $275 million FloodSmart Re Ltd. (Series 2023-1) cat bond deals.

Added to which, FEMA had secured $502.5 million of traditional reinsurance at the start of this year.

As we explained last week, when this new cat bond issuance was settled, FEMA’s reinsurance resources have shrunk considerably in the hard market environment.

The traditional reinsurance placement had been only half the prior year, while this latest cat bond does not replace maturing cat bond coverage and is actually the smallest of the six FloodSmart Re deals issued to-date.

The NFIP reinsurance and cat bond tower was at its largest back in 2022, when the US government backed flood insurance program had $2.7 billion of reinsurance limit available to it for a short time, but over $2.4 billion after a cat bond soon matured, from traditional and cat bond market sources.

The traditional limit has shrunk more than the cat bonds though, as it has halved for 2023, while a year ago FEMA had $1.425 billion of NFIP flood reinsurance protection for the NFIP through the named storm season, so the cat bond component of the coverage has shrunk far less.

This demonstrates the vital importance of the capital markets within the FEMA reinsurance tower, a critical source of reliable and long-term capital to protect the NFIP and ultimately taxpayers.

FEMA noted that it is set to pay roughly $50.4 million in premiums for the first year of reinsurance coverage from the new FloodSmart Re cat bond, while the arrangement will cover the NFIP for 5% of losses between $7 billion and $8 billion and 11.25% of losses between $8 billion and $10 billion, from qualifying named storm related flooding.

“I’m pleased that FEMA has successfully secured favorable terms for this year’s capital market reinsurance despite the tough market conditions of 2022,” explained David Maurstad, FEMA’s Acting Associate Administrator for Resilience and senior executive of the National Flood Insurance Program.

“The investment is vital to FEMA’s ability to transfer risk in order to stabilize the program’s claims paying capacity as the country continues to adjust to more intense and frequent flooding events,” he added.

FEMA’s use of catastrophe bonds continues to be a critical piece of its risk financing and supports the financial strength of the NFIP in the event of hurricane driven flood disasters.

Catastrophe bonds are now the biggest piece of the NFIP’s reinsurance tower by a significant margin in 2023 and it will be interesting to see whether FEMA could elect to return with a second cat bond this year, to further extend its reinsurance program.

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.