Having increased its estimate for National Flood Insurance Program (NFIP) losses from hurricane Helene, we’re told that FEMA has gone ahead with the partial repayment of principal and also extended the maturity dates for two of its FloodSmart Re catastrophe bond tranches.
The U.S. Federal Emergency Management Agency (FEMA) had put an initial estimate for NFIP claims from hurricane Helene’s flooding in a range from $3.5 billion to as much as $7 billion back in November 2024.
We then reported in January that sources told us the NFIP’s ultimate net loss from the hurricane event had been updated to an estimate for $6.75 billion of losses to the flood insurance program.
At that time we said that the Helene loss estimate was sufficiently high that it could cause some small losses to one of the FloodSmart Re catastrophe bond tranches, while it was also nearing the attachment point for FEMA’s traditional flood reinsurance program.
As a result, we were told at that time that FEMA was planning to extend the maturity dates for two tranches from the FloodSmart Re Ltd. (Series 2022-1) cat bond issuance from February 2022, which had been scheduled to mature in February 2025.
Read our article from earlier this week: FEMA said to have halted work on FloodSmart Re 2025-1 catastrophe bond.
Now, we can confirm that the two riskier tranches of this FloodSmart Re 2022-1 cat bond, the Class B and C tranches of notes, have seen the expected partial repayments of principal and also had their maturity dates extended out to February 25th 2026, a one year addition.
Once a loss estimate rises above a certain percentage of the attachment point for a cat bond, a sponsor can opt to extend the maturity for the cat bond notes to retain the coverage in order to cover any future potential loss developments.
As we reported earlier this month, FEMA had updated its estimate for National Flood Insurance Program (NFIP) losses from hurricane Helene, putting it at between $6.4 billion and as high as $7.4 billion.
However, that increase in the hurricane Helene loss estimate for the NFIP has not changed the partial repayment amount, as it was already scheduled for the latest payment date to investors.
The riskiest tranche of the FloodSmart Re 2022-1 cat bond issuance is the $25 million Class C notes, which have an attachment at around the $6.52 billion level, while the $100 million Class B tranche of the FloodSmart Re 2022-1 cat bond have an attachment at around the $7.4 billion mark.
As a result, both are considered at-risk of potential loss payouts due to hurricane Helene, given where the loss estimate now stands.
When we reported in January on these FloodSmart Re 2022-1 cat bond tranches we had learned that, at the time, the plan was for Class B notes some $80.9 million of the outstanding principal was set to be repaid to investors, leaving just $19.1 million outstanding. While for the Class C notes $2.7 million of the original $25 million of principal was set to be repaid to investors, leaving $22.3 million outstanding.
Now, we’ve learned this repayment of principal occurred last week, with the extension of maturity made at the same time.
As a result, this has reduced the outstanding size of these two FloodSmart Re cat bond tranches (to the sizes we detailed above) while they are now also extended by one year, to allow for any development of the NFIP’s hurricane Helene loss estimate in the interim period.
We should also note that another cat bond in the series, the FloodSmart Re Ltd. (Series 2023-1) deal, has a $50 million Class B tranche of notes which had an initial attachment point of $7 billion of NFIP losses from a named storm related flood event. While we do not know where the latest attachment point is after reset, if it remains close to the initial level this tranche may also be exposed to any loss creep from Helene.
These 2023-1 Class B notes are marked down for bids as low as in the 60’s we understand, indicating they are considered at some risk of the Helene loss creeping and then FEMA and the NFIP making reinsurance recoveries from them.
Meanwhile, the NFIP’s traditional reinsurance tower for calendar year 2024 provided $619.5 million in coverage above a $7 billion attachment point, meaning the NFIP’s traditional reinsurance tower may be at-risk should the UNL from hurricane Helene settle above that level.
On the two tranches which have been partially repaid, the remaining $19.1 million outstanding of the FloodSmart Re 2022-1 Class B notes are priced as low as around the 50’s, while the Class C notes remaining $22.3 million outstanding are priced as low as in the 30’s.
It’s worth mentioning that this is a case of catastrophe bond backed reinsurance working precisely as intended, with cat bond tranches that had been scheduled to mature have now been extended, while FEMA has opted to return some of the outstanding capital to investors given it does not believe they would be completely recovered from.
Now those two tranches remain available to FEMA to pay reinsurance recoveries should the NFIP’s ultimate loss from hurricane Helene rise further.
All of which protects the US government and taxpayers from financial impacts, as some of the burden would be borne by the reinsurance and capital markets.
Which serves to demonstrate just why the catastrophe bond and reinsurance program have been effective in providing risk capital and risk management for the NFIP and for FEMA.
Read our article from earlier this week: FEMA said to have halted work on FloodSmart Re 2025-1 catastrophe bond.
Read all about FEMA’s NFIP catastrophe bonds under the FloodSmart Re series of deals.
