The Federal Emergency Management Agency (FEMA) has successfully secured $500 million of reinsurance for the National Flood Insurance Program (NFIP) from the capital markets with the issuance of its FloodSmart Re 2018-1 catastrophe bond.
The transaction, which was backed by more than 35 capital markets investors, significantly expands FEMA’s reinsurance program, which has now transferred $1.96 billion of NFIP’s flood risk for the 2018 hurricane season to the private sector.
FEMA originally launched the transaction with a target of $275 million in mid-July, but later increased the value to $500 million due to strong investor demand.
The Agency announced in April that it planned to tap into the capital markets for the first time with a cat bond that would reduce the NFIP’s exposure to U.S flood risk.
“Reinsurance is a lynchpin to help strengthen the financial framework of the NFIP,” said David Maurstad, Chief Executive of the NFIP. “Engaging capital markets was the logical next step in maturing the NFIP 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.”
Additionally, Hannover Re, through its subsidiary Hannover Re (Ireland) Designated Activity Company (DAC), acted as a ‘transformer’ for the deal by transferring the $500 million of NFIP flood exposure to capital markets investors and sponsoring the issuance of the cat bond through a special purpose reinsurer.
FEMA will pay $62 million in premium for the first year of coverage, with the cat bond term running for three years from August 1st 2018 to July 31st 2021.
Under the terms of the reinsurance agreement, Hannover Re will cover 3.5% of losses for qualifying flood events between $5 billion and $10 billion, and 13% of losses between $7.5 billion and $10 billion.
According to the Artemis Deal Directory, FloodSmart Re 2018-1 will be the first cat bond to provide reinsurance coverage solely for flood risks, although its terms apply exclusively to flood exposure resulting from U.S named storms.
Following Hurricane Harvey, FEMA recovered the full $1.042 billion of traditional reinsurance coverage that it secured from 25 reinsurers in January 2017, leading it to expand its traditional reinsurance placement by 40% at January 2018 to $1.46 billion.
“By engaging both the traditional reinsurance markets and the capital markets,” FEMA explained, “the NFIP can reduce risk transfer costs, access greater market capacity, and further diversify its risk transfer partners.”
FEMA contracted with Guy Carpenter and GC Securities, a division of MMC Securities, which is a subsidiary of Marsh & McLennan Companies, to serve as structuring agent for the deal.
Furthermore, Aon Reinsurance Solutions provided financial advisory services for the transaction, while Aon Securities served as joint book runner with GC Securities, and catastrophe modeller KatRisk LLC analysed NFIP risk for investors.
“More than 35 capital markets investors provided fully-collateralized protection to FEMA/NFIP on the landmark and first-ever indemnity-triggered catastrophe bond (FloodSmart Re’s USD 500 million Series 2018-1 Notes) exposed to flood risk arising from tropical cyclones,” said Cory Anger, Global Head of ILS Origination and Structuring at GC Securities.
“We are honored to have assisted FEMA/NFIP in building a capital agnostic risk transfer program that now delivers innovative catastrophe bond protection from private capital sources in support of its existing cornerstone reinsurance placements,” he added.
