Swiss Re Insurance-Linked Fund Management

PCS - Emerging Risks, New Opportunities

Sierra Ltd. (Series 2021-1)

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Sierra Ltd. (Series 2021-1) – At a glance:

  • Issuer: Sierra Ltd.
  • Cedent / sponsor: Funds managed by Bayview Asset Management, LLC
  • Placement / structuring agent/s: Goldman Sachs is sole structuring agent and joint bookrunner. Swiss Re Capital Markets is joint bookrunner
  • Risk modelling / calculation agents etc: RMS
  • Risks / perils covered: U.S. earthquake
  • Size: $200m
  • Trigger type: Parametric
  • Ratings: NR
  • Date of issue: Jan 2021

Sierra Ltd. (Series 2021-1) – Full details:

This is the second catastrophe bond transaction where 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 entered the catastrophe bond market in late 2019 with a $225 million Sierra Ltd. (Series 2019-1) transaction, sourcing parametric insurance protection from the capital markets for its Cayman Islands based Bayview MSR Opportunity Master Fund, LP mortgage focused investment strategy.

This demonstrated a way for large asset holders and owners to carve out catastrophe risks from their portfolios and transfer them to the capital markets using parametric triggers and insurance-linked securitization technology.

Now, Bayview Asset Management is back looking to expand its capital markets backed earthquake insurance protection with a second catastrophe bond, a currently $150 million Sierra Ltd. 2021-1 transaction.

Once again, the risk transfer counterparty is the Bayview MSR Opportunity Master Fund, LP mortgage focused investment strategy operated by the asset manager.

The Sierra Ltd. Bermuda domiciled special purpose insurer (SPI) will look to issue two classes of notes, that will be sold to investors and the proceeds used to collateralize underlying insurance or reinsurance like risk transfer agreements between the counterparty and Sierra.

These Sierra Ltd. cat bonds are particularly interesting as no fronting reinsurance counterparty is used. Instead the risk transfer contract is directly between the Bermuda SPI and the cedent, in this case a Cayman Islands investment fund.

That’s interesting because it demonstrates that capital markets sources of risk, insurance and reinsurance capital can be reached through a direct transaction between the issuing SPI vehicle and the sponsor, suggesting corporate sponsors could also achieve this for parametric or index based risk transfer (or perhaps utilise a captive if they want indemnity protection).

The Sierra 2021-1 catastrophe bond will provide Bayview’s investment fund with parametric earthquake insurance protection across the U.S. states of California, Oregon, South Carolina and Washington, we understand.

These are the same states covered as in the first Sierra cat bond, representing where Bayview’s greatest concentration of earthquake exposure in its mortgage portfolios lies.

Coverage is on a parametric trigger and per-occurrence basis across a three year term, sources said.

Sierra Ltd. will issue a $100 million Class A tranche of notes that will have an expected loss of 0.79% and are being marketed to investors with a coupon in a range from 3% to 3.25%, and a $50m million Class B tranche of notes that are riskier with an initial expected loss of 2.71% and coupon price guidance of 5.25% to 5.75%.

These are the same initial expected loss figures as were seen in the first Sierra Ltd. transaction, suggesting that Bayview understands where its pain points would be and knows where contingent sources of capital are best structured to respond for it, if a major earthquake occurs.

The first Sierra cat bond saw its Class A notes price at 3.25% and Class B notes price at 5.75%, so the top-end of the ranges for this second issuance. As a result, it will be interesting to see where it settles.

Update 1:

For this second issuance, Sierra Ltd. was aiming to issue a $100 million Class A tranche of notes, but we’re now told that this tranche is targeting from that $100 million up to $150 million in terms of size.

The Class A notes will have an expected loss of 0.79% and were first offered to investors with a coupon in a range from 3% to 3.25%, but the price guidance has now been lowered, to 2.7% to 3%.

The Class B tranche of notes, which are riskier, continue to target a $50m million issuance, with an initial expected loss of 2.71%. This tranche were first offered to investors with coupon price guidance of 5.25% to 5.75%, but this has now also been reduced to 4.75% to 5.25%.

Update 2:

The Class A notes were first pitched at $100 million in size, but have now been successfully increased to $150 million.

We’re now told the $150 million of Class A notes have been priced at the low-end of reduced guidance, at 2.7%, representing a 14% decline in pricing from the initial mid-point during marketing.

The riskier Class B tranche of notes are still a $50m million issuance, but have been priced at the low-end of reduced guidance as well, with a coupon of 4.75% and so representing a 14% drop in pricing from the initial mid-point.

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