Swiss Re Capital Markets, the insurance-linked securities (ILS) focused unit of the global reinsurance firm, has successfully helped to bring the first parametric catastrophe bond covering some of the earthquake risks in a portfolio of mortgage investments to market.
Calling the recently completed Sierra Ltd. (Series 2019-1) catastrophe bond transaction “pioneering” the reinsurer explained that the transaction is the first parametric earthquake cat bond that hedges mortgage risks from earthquake on behalf of Bayview’s MSR Opportunity Fund.
That’s a mortgage focused investment fund managed by Bayview Asset Management, LLC.
This cat bond is pioneering for a number of reasons, as it is the first time we’ve seen an asset holder looking to carve out the catastrophe exposure embedded in its investment portfolio.
It’s also pioneering as our sources tell us that it was the sponsoring investment manager that spotted an opportunity to look to parametric protection from the capital markets, so almost originating the idea of the transaction for itself and then turning to specialists such as reinsurance firm Swiss Re to assist in getting the deal to market.
Swiss Re Capital Markets acted as the sole structuring agent and joint-bookrunner for the Sierra Ltd. catastrophe bond, which was successfully upsized by 50% while marketing to close offering Bayview a $225 million source of parametric earthquake risk transfer for its mortgage funds portfolio.
The coverage from the parametric trigger is ultimately for mortgage default risk caused by earthquakes in California, Oregon, Washington and South Carolina.
To effect the risk transfer, the Bayview fund entered into a derivative agreement with special purpose insurer Sierra Ltd., which then provides protection on a parametric per-occurrence basis against earthquakes.
The cat bond which came in two tranches has a three-year risk period and will utilise data provided by the U.S. Geological Survey for its trigger.
Jean-Louis Monnier, Head of Retro & ILS Structuring of Swiss Re’s Alternative Capital Partners unit explained, “We’re proud to have worked with Bayview in structuring and placing the first parametric catastrophe bond designed to protect against mortgage default caused by earthquakes. Parametric solutions help speed up the claims process, while offering greater transparency to investors.
“This landmark transaction underscores the potential of the capital markets in helping to reduce the hedging gap and build resilience against uninsured risks prevalent in the U.S. mortgage markets.”
This transaction demonstrates to investors and holders of assets how specific risks can be carved out and transferred to the capital markets, something that could provide inspiration to large asset owners with portfolios exposed to similar catastrophe risks such as earthquakes, or perhaps even to asset owners that carry significant exposure to other potentially catastrophic risks related to climate change, sea level rise and other severe weather exposures.