Frontline Re Ltd. (Series 2018-1)

This is the first catastrophe bond transaction to be sponsored by Frontline Insurance, as the insurer which is particularly active on the coast seeks to leverage the capital markets as a source of reinsurance for itself and subsidiary First Protective as protection against U.S. tropical storms and hurricanes.

We’re told that Frontline Re Ltd. has been established as a new Bermuda special purpose insurer to issue two tranches of Series 2018-1 notes that will be sold to catastrophe bond investors and the proceeds used to collateralize underlying reinsurance agreements between Frontline Re and the sponsor Frontline Insurance.

The Frontline Re cat bond is targeting $350 million of reinsurance coverage for the sponsor, which is a relatively large transaction for a first time sponsor, which will provide Frontline Insurance and subsidiary First Protective with coverage against certain losses from U.S. named storms.

The coverage is initially for the states of Florida, North & South Carolina and Alabama, but can be extended to more states should Frontline expand to them during the term of the transaction.

The $350 million of reinsurance protection will be on an indemnity and per-occurrence basis across a four-year term, with the reinsurance sitting alongside Frontline’s Florida Hurricane Catastrophe Fund (FHCF) coverage and also working alongside stated reinsurance layers.

The transaction will effectively provide cascading coverage, as the attachment point will drop for second and subsequent events, where the total principal has not been eroded. We’re told that initially the notes would attach at $315 million of losses after Frontline’s retention.

The transaction will see Frontline Re Ltd. issuing two tranches of notes, a $250 million Class A tranche which is the less risky layer and a $100 million Class B tranche which sits beneath the A notes.

The Frontline Re 2018-1 Class A notes will have an initial attachment probability of 6.12%, an initial expected loss of 4.04% and are offered to cat bond investors with coupon guidance in a range from 6.75% to 7.25%.

While the Frontline Re 2018-1 Class B notes, the riskier layer, will have an initial attachment probability of 10.76%, an initial expected loss of 8.13% and are offered to cat bond investors with coupon guidance in a range from 11.5% to 12.25%.

Update 1:

The Frontline Re 2018-1 Class A notes, which have an initial expected loss of 4.04%, were launched with coupon guidance in a range from 6.75% to 7.25%. But this has now been fixed at the middle of that range, at 7% we’re told.

The Frontline Re 2018-1 Class B notes, with an initial expected loss of 8.13%, were offered to cat bond investors with coupon guidance in a range from 11.5% to 12.25%. This tranche now has its pricing fixed just below the mid-point, at 11.75% we understand.

Update Q1 2019:

The Frontline Re cat bond’s riskier $100 million Class B tranche is considered at risk of potential losses due to the sponsors rising ultimate loss from 2018’s hurricane Michael. Currently the notes are marked down and discounted roughly 50% on secondary cat bond pricing sheets.

Update January 2020:

The Frontline Re cat bonds Class B notes have been marked right down to bids around 20 on broker pricing sheets, with secondary trades seen at both 20 and 10 cents on the dollar, implying investors are expecting this tranche will face a total loss once the sponsors full ultimate loss from hurricane Michael is understood.

Update June 2021:

The $250 million Class A tranche of notes remain marked down at anything from 55 to 75 cents on the dollar in broker pricing sheets, implying up to a 45% loss of principal for this layer is still anticipated as hurricane Michael still develops for the sponsor.

Meanwhile, the once $100 million Class B tranche of notes have had their principal reduced to $23.63 million, suggesting reinsurance recoveries made and remain marked down at around 5 cents on the dollar, suggesting the majority of this layer is expected to pay out.