Mortgage security focused investment manager Bayview Asset Management, LLC has returned to the catastrophe bond market for its second transaction, as the investor seeks upwards of $150 million of parametric earthquake protection from a Sierra Ltd. (Series 2021-1) cat bond deal.
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.
It was seen as one of the landmark catastrophe bond transactions that completed in the record year for the market in 2020, as never before has an investment manager looked to cat bonds as a way to carve out specific risks from investment portfolios, something that shows what might be possible for those dealing with catastrophe and also climate exposures in portfolios of investment and physical assets.
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.
This is also the first new catastrophe bond to hit the market in 2021.
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.
We continue to believe that it’s only a matter of time until more catastrophe bond transactions of this kind come to market.
Think of the GSE’s, mortgage holding banks and investors, as well as corporate giants (Google et al) with thousands of staff and high-value infrastructure located in earthquake hot spots, investment giants (holders and also owners of assets) carrying huge climate and catastrophe exposure in their portfolios, or even the natural disaster risks faced by government-owned portfolios of infrastructure, as well as numerous other use-cases.
These Sierra Re catastrophe bonds are an example of a large asset holder using the insurance-linked securities (ILS) market, with a cat bond structured to use a parametric trigger, as an efficient way to access a source of capital market backed disaster insurance funding, that will pay-out contingent on the occurrence of a specified event.
This is a use-case we’ve been championing for years, explaining that mortgage holders such as the two government-sponsored enterprises (GSE’s) Fannie & Freddie should transfer their earthquake risk, that banks exposed to mortgage loans should cover their natural disaster exposures or mandate customers do, and that there are climate or natural related peril exposures embedded in asset portfolios that could (perhaps should) be hedged and transferred.
We look forward to seeing more such transactions come to market over the coming years.