Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Sierra Ltd. (Series 2019-1)

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Sierra Ltd. (Series 2019-1) – At a glance:

  • Issuer: Sierra Ltd.
  • Cedent / sponsor: Funds managed by Bayview Asset Management, LLC
  • Placement / structuring agent/s: Swiss Re Capital Markets is sole structuring agent and joint bookrunner. Goldman Sachs is joint bookrunner
  • Risk modelling / calculation agents etc: RMS
  • Risks / perils covered: U.S. earthquake
  • Size: $225m
  • Trigger type: Parametric
  • Ratings: NR
  • Date of issue: Jan 2020

Sierra Ltd. (Series 2019-1) – Full details:

This is an unusual catastrophe bond transaction in that the beneficiary of the risk transfer protection is an investment fund under the management of Bayview Asset Management, LLC that allocates its capital into mortgage related securities.

Bayview MSR Opportunity Master Fund, LP, a Cayman Islands domiciled fund, invests predominantly in GSE sourced mortgage credit related securities, which are exposed to loan defaults and as a result have exposure to earthquake risks.

This transaction will see Bermuda based special purpose insurer Sierra Ltd. issuing a single tranche of notes that will be exposed to U.S. earthquake risks on a parametric trigger basis, providing a source of earthquake risk transfer and insurance to the Bayview managed investment fund.

It’s a novel transaction, but one that makes a good deal of sense given the earthquake exposure within the mortgage securities investment marketplace is significant and having a source of capital that can pay out to you quickly, should a major quake occur, would help an investor or investment manager mitigate its exposure somewhat.

It’s a first of its kind transaction (due to the beneficiary or counterparty being unique) for the catastrophe bond market and as such could stimulate interest more broadly in transferring earthquake risk among holders of mortgage related risks and securities.

Both tranches of Series 2019-1 cat bond notes issued by Sierra Ltd. will be exposed to earthquakes in the U.S. states of California, Oregon, South Carolina and Washington, we understand. These are likely the states with the highest earthquake risk and greatest concentration of mortgage loans in the investment portfolio.

The notes will provide their coverage through a parametric trigger that uses USGS data as its input and on a per-occurrence basis, across a term that is expected to be just under three years but with a single risk period, it seems.

If an earthquake occurs in the covered area, the parameters associated with it will be taken and an index derived to identify whether the quake was severe enough to breach the trigger and cause a payout for either tranche of notes.

Sierra Ltd. will look to issue and sell to investors the two tranches of notes and the proceeds will be used as collateral to underpin the risk transfer agreements, as insurance or reinsurance capital secured in case of a triggering event occurring, while the investors will be paid a coupon for holding the risk.

A Class A tranche of notes is being offered as a $100 million layer of risk, with an attachment probability of 1.77%, an expected loss of 0.79% and a coupon guidance range of 3.25% to 3.75%, we understand.

A Class B tranche is targeting $50 million of coverage, across a riskier layer that has an attachment probability of 4.13%, an expected loss of 2.71% and a coupon guidance range of 5.5% to 6.25%.

Update 1:

The Sierra Ltd. 2019-1 parametric earthquake cat bond for a mortgage investor is targeting an upsized level of coverage, aiming to secure between $185 million and $225 million of capacity for the sponsor.

The Class A tranche of notes is now targeting between $125 million and $150 million of coverage and has had its pricing fixed at 3.25%, while the Class B tranche is targeting between $60 million and $75 million of coverage and has tighter price guidance of 5.5% to 5.85%.

Update 2:

The Sierra Ltd. 2019-1 cat bond successfully increased in size to $225 million, a 50% uplift on the original target for the issuance.

At the same time the largest now $150 million Class A tranche of notes, which are the less risky layer with an expected loss of 0.79%, priced at the bottom end of initial coupon guidance, at 3.25%.

The $75 million Class B tranche of notes, which are the riskier layer with an expected loss of 2.71%, priced at 5.75% in the end, which is still in the lower half of initial coupon guidance.

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