U.S. primary insurer Frontline Insurance, which has a significant coastal focus within its portfolio, is to tap the capital markets as a source of reinsurance through its first catastrophe bond issue, as the insurer sponsors a $350 million Frontline Re Ltd. (Series 2018-1) transaction.
Frontline Insurance has exposure in a number of U.S. hurricane exposed states, including Florida, the Carolina’s and Alabama, hence accessing the appetite of ILS investors to assume this risk will help the insurer to diversify its reinsurance panel, while benefiting from efficient and fully-collateralized coverage.
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.
We understand 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.
According to sources, 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%, we understand.
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%, we are told.
It’s encouraging to see another new sponsor coming to the catastrophe bond market in 2018, as the efficiency and effectiveness of cat bond backed reinsurance protection continues to gain popularity among a broadening sponsor base, while the asset class continues to gain appreciation from global institutional investors.
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