Further $10m redeemed from at-risk FloodSmart 2020-1 cat bond notes

There has been an additional $10 million redemption of outstanding principal from the extended Class B tranche of notes issued under the US Federal Emergency Management Agency’s (FEMA) FloodSmart Re Ltd. (Series 2020-1) catastrophe bond issuance, Artemis has learned.

We reported earlier this month that this one tranche of the FloodSmart Re catastrophe bond program had its maturity date extended, in order to allow for further development of the National Flood Insurance Program’s (NFIP) flood insurance losses from hurricane Ian.

The FloodSmart Re 2020-1 cat bond issuance from early 2020 had been scheduled to mature at the end of February this year, but this riskiest Class B tranche was extended in case the NFIP’s losses rose sufficiently to attach the reinsurance coverage they provide.

As we reported, the $100 million Class B tranche of notes first saw a partial redemption, with the outstanding principal reduced by $80 million, which left $20 million of the notes still outstanding.

Now, we’ve been told by sources that a further $10 million redemption of the outstanding principal has been actioned, now leaving just $10 million of the FloodSmart Re 2020-1 Class B tranche of notes outstanding until the end of February 2027.

As with any redemption, we assume the capital has been returned to investors in this hurricane Ian exposed tranche of catastrophe bond notes, with now 90% of the risk capital that had been backing this tranche of notes returned.

Presumably, FEMA now has even greater clarity over the potential quantum of insured loss the NFIP faces in relation to hurricane Ian, allowing it to redeem a further slice of the outstanding notes.

This particular cat bond tranche covers a tiny 3.04% sliver of a layer of the NFIP reinsurance tower, attaching at around $5.7 billion and stretching to $9 billion of losses.

As a result, just the $10 million remaining slice of the FloodSmart Re 2020-1 Class B catastrophe bond notes could cover the NFIP up to an ultimate hurricane Ian loss of in excess of $6 billion.

FEMA’s latest insured loss estimate for the NFIP from hurricane Ian was for claims to fall between $3.7 billion and $5.2 billion.

By March 8th 2023, the National Flood Insurance Program had received 46,400 claims from hurricane Ian and paid $3.2 billion to-date, so the claims paid total was approaching the lower-end of FEMA’s loss estimate.

But with this particular cat bond tranche not even attaching until $500 million of losses above the top-end of that estimated range, it seems FEMA is just being cautious by extending the maturity of the notes and hence feels only retaining the $10 million of capital is sufficient to cover any hurricane Ian loss creep eventualities.

You can see details of many catastrophe bonds that have been triggered and made payouts, as well as those cat bonds currently at-risk, since the market began in our Deal Directory.