The innovative Sierra Ltd. (Series 2019-1) catastrophe bond transaction, that is designed to provide parametric U.S. earthquake protection to an investment manager’s portfolio of mortgage related securities, has successfully upsized by 50% to reach $225 million for the sponsor.
The Sierra Ltd. catastrophe bond was launched in November represents a first for the market, as the sponsor of the transaction and beneficiary of the insurance protection it provides will be a major asset holder of U.S. mortgage securities, an investment fund under the management of Bayview Asset Management, LLC.
It’s the first catastrophe bond we’ve listed in our extensive cat bond Deal Directory to have this specific use-case, since we began tracking this market in 1996.
It marks a step forward for the cat bond market, in providing catastrophe insurance and risk transfer related protection to a new class of sponsor.
This deal offers a niche but potentially important example of how the insurance-linked securities (ILS) market can help an investor better manage the natural catastrophe exposure embedded in its investment portfolio, by transferring out specific catastrophe risks to the capital market.
Sierra Ltd., a Bermuda domiciled special purpose insurer (SPI) vehicle, will issue two tranches of Series 2019-1 notes, both of which will be exposed to U.S. earthquake risks on a parametric trigger basis.
The notes are set to be sold to cat bond investors, with the resulting proceeds used to collateralise underlying risk transfer agreements using insurance or reinsurance capital, for Bayview managed GSE mortgage securities focused investment fund, the Bayview MSR Opportunity Master Fund, LP.
As a result, this Sierra cat bond will provide Bayview with a source of earthquake risk transfer and insurance, covering the U.S. states of California, Oregon, South Carolina and Washington, on a per-occurrence basis using a parametric trigger that will utilise USGS data as its input.
When this transaction was launched it was seeking to secure just $150 million of insurance or reinsurance capital covering parametric earthquake risks for the Bayview mortgage focused investment fund.
Now, the transaction has has successfully increased in size by 50%, with the issuance now set to complete to offer $225 million of capacity to the sponsor.
It’s a significant upsizing, demonstrating the appetite of cat bond investors for parametric earthquake risks, as well as their comfort to provide capacity for a slightly different use-case and a different type of sponsoring entity than the usual insurance or reinsurance firm they are more familiar working with.
The Class A tranche of notes, the lower risk layer, had originally launched targeting $100 million of coverage, across notes with an expected loss of 0.79% and they were offered to cat bond investors with coupon guidance in a range from 3.25% to 3.75%.
The Class A tranche has now upsized to $150 million and the pricing has now been fixed at the lowest end of guidance, at 3.25%.
The Class B tranche of notes, the riskier of the two, was launched with a target size of $50 million of coverage, across notes with an expected loss of 2.71% and a coupon guidance range of 5.5% to 6.25%.
The Class B tranche has upsized to provide $75 million of coverage, with the coupon settling at 5.75%, which is in the lower half of the original guidance range.
This cat bond clearly proved popular with investors, as evidenced by the upsizing and keen pricing secured.
The transaction demonstrates the cat bond market’s appetite to provide direct, corporate style, catastrophe risk transfer and the ability of cat bond funds and investors to mobilise large amounts of capacity that can meet protection buyers needs, even in a less familiar use-case.
This landmark transaction has the potential to open up a whole range of different use-cases for catastrophe bonds and parametric triggers.
It clearly demonstrates how they can help asset owners (monetary or financial in nature and physical assets), or large corporate protection buyers with significant physical and also people related assets, carve out and transfer catastrophe, natural disaster and even severe weather risks from their businesses, transferring them to efficient insurance and reinsurance related capacity from the capital market.
The Sierra Ltd. catastrophe bond will provide a responsive source of insurance protection for the asset manager beneficiary and its end-investors in the mortgage focused fund the coverage targets.