Suppose Gentry Insurance Partners specializes in underwriting managerial and cyber liability insurance coverages (e.g., D&O, employment practices, professional, electronic media, privacy loss). So far, Gentry has been spared any "nuclear verdicts", but the insurer is concerned that liability trends could spell disaster for the company as huge losses mount in the industry. Overall, external capital access / need has been estimated at $2.4 billion. Gentry's Current Reinsurance Program Gentry has four XoL treaty agreements in place that cover its entire book of business, as follows: Treaty 1 pays $200 million excess of $100 million Treaty 2 pays $500 million excess of $500 million Treaty 3 pays $250 million excess of $1 billion Treaty 4 pays $750 million excess of $1.25 billion Insurance-Linked Security Alternative Options for Raising Additional Needed Capital Option 1 is an preferred stock equity raise that would promise a $10 dividend per share and cost $110 per share. Option 2 is a contingent debt raise that is an annual $1,000 par bond with a 12% coupon, 15-year term to maturity, and priced at $1,160 per bond. Option 3 is a $10,000 par catastrophe bond issue with an 11% coupon, 3-year term to maturity, and priced at $9,490. Option 4 is a contingent loan deal wherein Gentry must pay a $20 million premium to buy the right to borrow $500 million at 5.5% interest if losses exceed $2 billion. Given the information provided, calculate: (i) The amount of capital the insurer still needs to access (aside from the reinsurance program). (ii) Gentry's weighted average cost of capital (WACC). (iii) Which of the four capital options is best for the insurer. Suppose Gentry Insurance Partners specializes in underwriting managerial and cyber liability insurance coverages (e.g., D&O, employment practices, professional, electronic media, privacy loss). So far, Gentry has been spared any "nuclear verdicts", but the insurer is concerned that liability trends could spell disaster for the company as huge losses mount in the industry. Overall, external capital access / need has been estimated at $2.4 billion. Gentry's Current Reinsurance Program Gentry has four XoL treaty agreements in place that cover its entire book of business, as follows: Treaty 1 pays $200 million excess of $100 million Treaty 2 pays $500 million excess of $500 million Treaty 3 pays $250 million excess of $1 billion Treaty 4 pays $750 million excess of $1.25 billion Insurance-Linked Security Alternative Options for Raising Additional Needed Capital Option 1 is an preferred stock equity raise that would promise a $10 dividend per share and cost $110 per share. Option 2 is a contingent debt raise that is an annual $1,000 par bond with a 12% coupon, 15-year term to maturity, and priced at $1,160 per bond. Option 3 is a $10,000 par catastrophe bond issue with an 11% coupon, 3-year term to maturity, and priced at $9,490. Option 4 is a contingent loan deal wherein Gentry must pay a $20 million premium to buy the right to borrow $500 million at 5.5% interest if losses exceed $2 billion. Given the information provided, calculate: (i) The amount of capital the insurer still needs to access (aside from the reinsurance program). (ii) Gentry's weighted average cost of capital (WACC). (iii) Which of the four capital options is best for the insurer
