FEMA’s NFIP reinsurance & cat bonds in focus after catastrophic flooding from Helene

This morning, we’re told that the significant flooding from rains associated with hurricane Helene throughout southeastern parts of the United States are bringing FEMA’s National Flood Insurance Program (NFIP) reinsurance tower and catastrophe bonds into some focus, although there is uncertainty over how a predecessor rainfall event prior to the storm even making landfall could factor in.

A catastrophic flooding situation developed over the weekend across some of the southeastern states that the tropical and then extra-tropical remnants of hurricane Helene passed through, with areas of western North Carolina and Tennessee seeing particularly devastating flood impacts, but other states also badly affected.

Helene’s inland impacts are set to be a significant component of its overall insurance and reinsurance market loss, as hurricane speed wind gusts extended far into Georgia and surrounds. But it is the double-digit inches of rainfall event that has really driven home the potential for storm impacts to be far more wide-reaching than the initial landfall state alone.

More than 100 people are reported to be have been killed across five states by the impacts of hurricane Helene, while over 2.7 million households were still without power on Sunday.

North Carolina has experienced a particularly catastrophic flood event, with communities shattered in western regions as extreme rainfall levels in the mountains flowed downstream and drove dam releases, river-overtopping, mud and landslides in numerous areas.

The impacts to property have been significant across western NC and into Tennessee, with some reports likening the situation to the flooding seen after hurricane Katrina, as waters reached first-floor and higher levels across some areas.

Deanne Criswell, the Administrator of the U.S. Federal Emergency Management Agency (FEMA) said hurricane Helene was a “true multi-state event” with historic flooding that has caused significant property and infrastructure damage, also reportedly citing “global heating” as a driver of the extremity of the event.

She said it will be a “really complicated recovery in each of the five states” of Florida, Georgia, North Carolina, South Carolina and Tennessee.

Criswell highlighted the role of water in the significant impacts and damage caused by hurricane Helene, with a 15 foot storm surge in Florida driving meaningful and wide-spread coastal flooding, but then well over 20 inches of rainfall recorded in parts of North Carolina and similarly high figures along the track of Helene as it turned extra-tropical.

Given the extent of the damage the recovery time is going to be long and for some communities in North Carolina and surrounds, the extreme flood levels may make recovery of some communities a case of full-rebuilding being required.

Private insurance market flood losses will be significant, where coverage is provided. Some private insurers have been expanding their flood offerings in recent years and there seems little doubt that, across Helene’s entire track, the flood claims burden for private insurers will likely be one of the highest ever borne.

But, of course a significant amount of flood insurance coverage is publicly provided via FEMA’s National Flood Insurance Program (NFIP) and flood remains a peril that is widely excluded by many private market insurance firms and even in the Farm Bureau entities homeowner offering as well.

As a result and given the particularly wide-reaching and catastrophic impacts seen from water with hurricane Helene, through surge and rainfall related flooding inland, the expectation is that the NFIP is facing a significant claims event, likely one of its biggest ever losses.

Which naturally brings into focus the NFIP traditional reinsurance tower and the NFIP’s in-force catastrophe bonds under the FloodSmart Re series of deals.

FEMA’s NFIP insurance policies cover both storm surge and pluvial (rainfall-related) flood damages where in-force.FEMA started to buy a reinsurance tower for the NFIP back in 2017 and has renewed it ever since, with the latest renewal at January 1st 2024 seeing FEMA securing a traditional reinsurance tower for the NFIP that provides $619.5 million in coverage.

Named tropical storms are one of the biggest threats the NFIP faces, in terms of drivers of a significant volume of claims and hence its catastrophe bonds are a capital markets backed way to augment its reinsurance specifically for named storm related flood and surge loss events.

At this time, the NFIP’s FloodSmart Re catastrophe bond program provides an additional $1.3 billion in reinsurance that covers flood events caused by named storms, from the cat bond issuances brought to market in 2022, 2023 and earlier in 2024.

As a result, all of the traditional reinsurance and the FloodSmart Re cat bonds would be considered potentially exposed to an event like hurricane Helene, although whether any of the program faces a risk of loss is at this time impossible to know.

The NFIP reinsurance and cat bonds have come into focus though and we’ve had a number of enquiries from cat bond investors, as well as from sources in the reinsurance community telling us that there are some parties out there who are concerned Helene could threaten the tower and perhaps even some of the cat bonds.

In fact, we understand there have been some enquiries with reinsurance brokers about potential ways to dead-cat hedge the claims that flow to the NFIP, seemingly either for participants in the NFIP reinsurance tower that are looking for retrocession, or cat bond holders that feel their investments may be exposed to Helene’s water-related losses.

Here, it’s important to state again that at this time there is no way of knowing how extensive the NFIP claims burden will be for the entire duration and impacts of hurricane Helene and it will be some time before that becomes clear.

From cat bond fund managers, at this time we aren’t hearing any noises of particular concern, regarding the FloodSmart Re tranches that would be exposed to a rising Helene loss burden for the NFIP

Reinsurance broker Guy Carpenter had previously said that it expected hurricane Helene could become a top-10 claims event for the NFIP.

For reference, the 10th largest NFIP claims event was hurricane Irma in 2017 with just under $1.1 billion of NFIP flood claims. That level of claims is likely to be significantly eclipsed with Helene, given the extent of the damage footprint and just the surge impacts could get close perhaps.

Even the fifth largest NFIP loss event was hurricane Ike in 2008 at just over $2.7 billion, while at four there was 2022’s hurricane Ian at $4.3 billion, at three Superstorm Sandy from 2012 at just under $9 billion, at two 2017’s hurricane Harvey at over $9 billion, and at the top was 2005’s hurricane Katrina at over $16.3 billion in NFIP claims (all in dollars at the year they occurred).

It appears certain hurricane Helene will be a top-10 NFIP loss event and at this stage, based on the limited information available through media reports showing the extensive flood damage, quite likely it will find its way into the top-5, although just how high the NFIP loss could go is unknown at this time.

There is also some added uncertainty thrown into the mix by the fact parts of the worst affected areas in North Carolina has witnessed a so-called predecessor rainfall event even before hurricane Helene had made landfall further south.

Between 8 and 12 inches of rainfall had been experienced in parts of western North Carolina and the Appalachians, meaning the ground was already soaked and rivers already rising even before Helene had made its way that far north. In certain circumstances this could have ramifications for insurance claims and whether they are from the predecessor rainfall or hurricane Helene, although in the case of the NFIP cover almost all of the most catastrophic damage has clearly been seen from Helene and with rainfall totals of above 20 inches from the named storm, it seems likely damage would be bundled under the Helene event.

The NFIP’s traditional reinsurance tower attaches relatively high up, in event loss terms, with the lowest layer of the just under $620 million of reinsurance providing the NFIP with cover for 8.9125% of losses between $7 billion and $9 billion and the higher layer providing cover for 22.0625% of losses between $9 billion and $11 billion.

So an event of $7 billion plus is required for the NFIP’s traditional reinsurance to even attach, which would already be a top-4 NFIP flood loss event.

On the FloodSmart Re catastrophe bond side, reinsurance coverage would begin to attach at $6 billion thanks to a higher-risk Class C tranche of the $450 million FloodSmart Re Ltd. (Series 2022-1) issuance and its coverage is spread across three layers with some protection afforded up to a $10 billion NFIP named storm related flood loss event.

The $275 million FloodSmart Re Ltd. (Series 2023-1) cat bond issuance has a lower-layer that attaches at $7 billion, with the full reinsurance from the cat bond spread across layers up to $10 billion again.

Finally, the $575 million FloodSmart Re Ltd. (Series 2024-1) catastrophe bond can attach its lowest layer of reinsurance coverage at $8 billion, but covers a share of the tower up to a higher $11 billion level.

So, while a $7 billion NFIP flood loss event can trigger the traditional reinsurance, there is some catastrophe bond coverage that would attach from the $6 billion level, thanks to the smallest $25 million Class C tranche of Series 2022-1 notes issued by FloodSmart Re.

That’s still a top-4 NFIP flood loss event that is required for the cat bonds to become exposed, while for the entire reinsurance and catastrophe bond protection to come into play it would need the NFIP’s losses from Helene to be its second most costly loss event on-record, second only to Katrina.

As we said, there is no clear visibility of how significant the claims burden for the NFIP will be at this time. But sources on the cat bond fund manager side we’ve spoken with are not seeming overly concerned about the potential for any cat bond losses at this time.

But, when you consider the widespread landfall storm surge impacts in Florida, the significant flood impacts that spread through Georgia, to South Carolina and worsened in Tennessee, then caused their most devastating impacts in western North Carolina, it does seem the NFIP’s claims bill will be a significant one and easily into the top-10 losses it has experienced.

Given the widespread and damaging flood impacts, it is no surprise we’ve had some enquiries regarding the catastrophe bonds of the NFIP.

We’ve also fielded some questions on other catastrophe bonds, particularly those exposed to North Carolina losses. But, at this time it seems the main ones in focus are the NFIP’s.

It will take some time before it is clear whether the NFIP’s losses could rise significantly into the top-10 event list, so we suspect some might consider the lower-layers of the cat bonds and reinsurance on-watch of sorts until additional clarity emerges, in terms of third-party sourced estimates for the NFIP’s claims or any reporting on claims from FEMA itself.

Overall though, the general feeling this morning in the ILS community is that there is some exposure to lower-layer collateralized reinsurance deals, especially for Florida specialist carriers, while the main additional and more immediate exposure from hurricane Helene remains seen through quota shares and aggregate deductible erosion.

It is early still and greater clarity will emerge with time.

Also read:

– Hurricane Helene private insurance loss seen mid-to-high single-digit billions: Bowen, Gallagher Re.
– Hurricane Helene economic loss in $20bn – $34bn range: Moody’s Analytics.
– Hurricane Helene insured wind/surge property loss in Florida/Georgia initially said $3bn – $5bn: CoreLogic.
– Losses to per-occurrence cat bonds from hurricane Helene currently seen as unlikely: Twelve Capital.
– Hurricane Helene landfall at Cat 4 140mph winds, Tampa Bay sees historic surge flooding.
– Hurricane Helene industry loss seen $3bn to $6bn if Tampa avoided: Gallagher Re.
– Minimal to no cat bond impact expected from hurricane Helene if track unchanged: Plenum.