FloodSmart 2020-1 Class B cat bond notes extended on Ian exposure

One tranche of the FloodSmart Re catastrophe bond program has had its maturity extended to allow for further development of the NFIP’s flood insurance losses from hurricane Ian, Artemis has learned.

The FloodSmart Re Ltd. (Series 2020-1) issuance from early 2020 were scheduled to mature at the end of February this year.

But, Artemis can now report that the riskier Class B tranche of notes were partially redeemed and then the remaining notes had their maturity extended, to allow for any further development of the National Flood Insurance Program’s ultimate loss from September’s hurricane Ian.

These were not the riskiest tranche of FloodSmart Re cat bond notes in FEMA’s 2022 reinsurance tower, that was a tranche from the 2021 issuance.

However, they were the next to mature and with FEMA’s NFIP still counting its claims from hurricane Ian, it makes sense that the riskiest tranche of the cat bond next to mature might be extended, to ensure the reinsurance coverage they provide would be available should the total claims from the storm rise above the attachment point for the notes.

The $100 million Class B tranche of Series 2020-1 cat bond notes issued by FloodSmart Re in February 2020 had a reset attachment point at around $5.7 billion of losses to the NFIP, covering a 3.04% sliver of a layer of the reinsurance tower stretching to $9 billion of losses.

We’re told the Class B tranche faced a partial redemption first, with the outstanding principal reduced by $80 million, so leaving just $20 million of the notes outstanding.

At the same time, the maturity date has now been extended through until the end of February 2027.

As we haven’t heard of FEMA making any reinsurance recoveries from the FloodSmart Re cat bond series yet, at this stage we assume the reduction in principal was to return capital to investors before the extension, leaving a small amount left to cover any adverse development of the NFIP’s loss from hurricane Ian.

As the notes covered such a thin percentage of a large layer of the NFIP’s reinsurance tower, that $20 million should be sufficient to cover quite a lot of loss creep, hence it makes sense the other $80 million would have been returned to investors in the cat bond.

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

If that proves accurate, then the FloodSmart Re catastrophe bonds will all be safe from loss from the storm’s flooding.

So, it’s a sensible move to extend maturity for some of the 2020-1 notes, to ensure that reinsurance coverage is still available, should that estimate prove to be insufficient as claims from Ian continue to be counted.

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