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FEMA launches first NFIP cat bond via FloodSmart Re

19th July 2018 - Author: Matt Sheehan

The U.S Federal Emergency Management Agency (FEMA) has launched its first catastrophe bond to transfer risk from the National Flood Insurance Program (NFIP) to the capital markets.

Flooded sign image via 89.3KPCCIssued via FloodSmart Re, a Bermuda domiciled special purpose insurance vehicle, the catastrophe bond will attempt to secure $275 million of reinsurance protection for FEMA.

Two tranches of notes have been issued to insurance-linked securities (ILS) funds and ILS investors to collateralise underlying reinsurance agreements to benefit FEMA and cover a portion of the NFIP U.S. flood exposure.

According to Artemis, the FloodSmart Re Ltd. (Series 2018-1) 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.

FEMA announced in April 2018 that it would consider tapping into the capital markets for the first time in order to bulk and diversify its expanding reinsurance programme arrangements.

Frank Nutter, President of the Reinsurance Association of America, commented: “The RAA has long advocated for the NFIP to utilize the private market to provide financial backing for the government’s flood risk.

“Along with its second successful placement of reinsurance coverage earlier this year, the cat bond issuance confirms FEMA’s continued commitment to expanding private sector backing and the financial protections it will afford the NFIP and American taxpayers.”

He added that FEMA had already recovered the full $1.042 of reinsurance coverage it placed with the private reinsurance sector in January 2017.

Hannover Re will also act as the ceding reinsurance firm for the transaction, fronting the coverage for FEMA and the NFIP, which will in turn enter into retrocession agreements with FloodSmart Re, with those agreements being fully collateralised by the proceeds of the issuance and the sale of the two tranches of notes.

This cat bond also marks the first multi-year flood reinsurance protection purchased by FEMA, as it provides three-year coverage on a per-occurrence basis, and utilises an indemnity trigger, according to Artemis.

The first tranche of Series 2018-1 notes is a $200 million Class A tranches that attaches at $7.5 billion of losses, covering a percentage up to $10 billion, with an initial attachment probability of 6.04% and expected loss of 4.94%.

The second is a $75 million Class B tranche that attaches at losses above $5 billion and covers a percentage up to $10 billion, giving the notes an initial attachment probability of 9.68% and expected loss of 6.32%.

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