Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Frontline Re cat bond trades at rock-bottom on hurricane Michael loss creep


The $350 million Frontline Re Ltd. (Series 2018-1) catastrophe bond transaction, that was sponsored by U.S. primary insurer Frontline Insurance in 2018, has seen one tranche trade at almost rock-bottom pricing on the threat of losses from hurricane Michael hitting the attachment point.

down-arrow-profitThe Frontline Re catastrophe bond, which provides $350 million of indemnity and per-occurrence reinsurance protection to Frontline Insurance and subsidiary First Protective against certain losses from U.S. named storms, has been marked down in the secondary market for some months now.

Right from the second-half of 2018, the Frontline Re cat bond notes began to be marked down as it became clear from cedant loss reports that 2018’s hurricane season had a particularly major impact on the firms insurance portfolio.

It appears that this was largely down to hurricane Michael, although given the Frontline Re cat bond coverage extends to the Carolina’s it also can’t be discounted that Florence may have had some effect. But sources suggest the majority of the impacts are from hurricane Michael and that these are impacts that continue, with Frontline’s losses still rising.

The riskier Class B tranche of notes issued by Frontline Re were marked down for bids of around 60 cents on the dollar when 2019 began, but that continued to slide throughout last year, with the Class B notes marked at around 20 in December 2019, while the higher layer Class A notes were marked around 95 still.

Showing that there are real concerns over the notes facing a total loss, the Class B notes had traded at around 22 cents on the dollar as far back as September 2019, but then they traded again at as low as 10 cents on the dollar right at the end of 2019, albeit a smaller sized trade we understand.

It reflects growing investor sentiment that the Frontline Re cat bonds Class B tranche of notes could face a total loss of principal, based on fears that the sponsors ultimate loss from 2018’s hurricane Michael will pass the attachment point for this layer of reinsurance coverage.

So currently it seems the Frontline Re Class B notes are marked down between 80% and 90% and the catastrophe bond investor base appears to be expecting the losses from hurricane Michael to keep creeping for the sponsor, driving a total loss of the $100 million of principal from this tranche.

As the expectation of losses has risen, the pricing for the $250 million, less risky, Class A tranche of notes issued by Frontline Re Ltd. has also declined somewhat.

This tranche is marked down roughly 15%, for bids of around 84 cents and these notes have traded around that level in recent weeks as well.

The Class A tranche sits directly on top of the Class B in Frontline Insurance’s reinsurance tower structure, so should the B’s be completely eroded by losses from hurricane Michael the Class A tranche above could immediately come into play.

We’ve added the Frontline Re cat bond to our directory of catastrophe bonds that have defaulted or are considered to be  at-risk of loss.

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