The U.S Federal Emergency Management Agency (FEMA) has significantly increased the scope of the capital markets reinsurance that it has secured for the National Flood Insurance Program (NFIP) via the issuance of its first catastrophe bond to $500 million.
Issued via FloodSmart Re, a Bermuda domiciled special purpose insurance vehicle, the catastrophe bond had originally attempted to secure $275 million of reinsurance protection to reduce the NFIP’s exposure to U.S flood risks.
FEMA confirmed in April 2018 that it intended to venture into the insurance-linked securities (ILS) market in order to broaden its sources of reinsurance to include ILS funds and capital market investors.
Now, investor demand has resulted in FEMA maximising its capital markets appetite by expanding the size of its FloodSmart Re 2018-1 cat bond by roughly 82%.
According to Artemis, FEMA’s cat bond will be the first to provide reinsurance coverage solely for flood risks, although it applies exclusively to flood exposure resulting from U.S named storms.
FloodSmart Re 2018-1 was originally issued across a $200 million Class A tranche and $75 million Class B tranche of notes, but has now been increased to two tranches with values of $325 million and $175 million respectively.
The Class A tranche has expected loss of 4.94%, while its pricing is expected to settle at the bottom end of the marketed 11.25% to 12% range, with investors set to receive a coupon of 11.25%, as shown by the Artemis Deal Directory.
Meanwhile, the Class B tranche has expected loss of 6.32% and its pricing has also been fixed at the bottom end of the marketed range of 13.5% to 14.25%, with investors set to receive a coupon of 13.5%.
Following the successful completion of the FloodSmart Re issuance, FEMA will benefit from $1.96 billion of flood reinsurance protection, with the capital markets and ILS investors contributing more than a quarter of the total program.
