Bosphorus 1 Re Ltd.

This catastrophe bond is being issued on behalf of the Turkish Catastrophe Insurance Pool, a state backed insurer which pools catastrophe exposure.

Bosphorus 1 Re Ltd. is a Bermuda registered special purpose insurer, registered on the island on the 11th January 2013.

The transaction seeks to provide the TCIP with a three year source of fully-collateralized earthquake reinsurance cover on a per-occurrence basis. The notes will provide reinsurance cover for earthquakes affecting primarily the Istanbul region of Turkey.

The transaction uses a parametric trigger, so the cat bond would be triggered by actual earthquake measurements and ground movement, with RMS providing the risk modelling.

Bosphorus 1 Re is seeking to issue a single tranche of Series 2013-1 Class A notes with a preliminary size of $100m.

Risk Management Solutions (RMS) are the risk modeller for the transaction and will use RMS’s Europe Earthquake Model for Turkey, which rating agency Standard & Poor’s note is the first time this model has been used in a rated cat bond transaction.

The reporting agency for the transaction, who will provide actual earthquake measurement data to be input into the RMSmodel, is Bogazici University’s Kandilli Observatory and Earthquake Research Institute (KOERI). The parametric loss trigger is based on data reported by KOERI, or a back-up agency.

For an event to qualify as ‘covered’ under the terms of the cat bond it must be an earthquake with a date of loss during the cat bond risk period and it must result in a spectral acceleration greater than 0.1g for at least 10% of the defined calculation locations, as confirmed by the calculation agent.

If the data is not available after an event, or does not meet data criteria, the calculation agent will source alternative data from sources such as the USGS ShakeMap.

An event index value will be calculated. If the resulting event index value is above the attachment level then a payment will be due to TCIP, how much that payment would be will depend on another calculation of the event index value versus the attachment and exhaustion levels.

According to RMS’ risk analysis there have been two historical events which it believes could have reached the index attachment point, one in 1509 and another in 1766, according to S&P. However, S&P notes that due to the uncertainty in historical earthquake data the events actual intensity is hard to confirm from the documentation available at the time.

While the cat bond does focus on the capital of Turkey Istanbul for its coverage area, it is not solely focused on Istanbul itself. We understand that the calculation locations are spread around the Istanbul area, including some coastal regions, so a large enough quake outside Istanbul has a remote chance of triggering the parametric factors if 10% of the calculation locations are sufficiently impacted.

The probability of attachment for the notes is 1.10%, the probability of exhaustion is 0.91% and the expected loss is 1.01%. On a cumulative basis the probability of attachment for year 1 of the deal is 1.10%, for year 2 2.18% and for year 3 it is 3.25%. We understand from our sources that the initial index attachment level is 2,156 and the initial index exhaustion level is 2,412.

The collateral from the sale of the notes will be deposited into a collateral account and then transferred to one or more highly rated U.S. Treasury money-market funds managed by MEAG MUNICH ERGO Kapitalanlagegesellschaft mbH. S&P note that funds in the collateral account were initially invested in a money market fund, MEAG Bosphorus 1/I, set up especially for this transaction and managed by MEAG MUNICH ERGO Kapitalanlagegesellschaft mbH.

TCIP will pre-pay 190 days of premium payments into a separate deposit account to ensure scheduled premium payments can be made even if the transaction was stopped before the end of the term if TCIP failed to pay its reinsurance premium.

At reset there is the ability for new calculation locations to be added to this deal. This could allow TCIP to broaden the geographic region that the transaction covers by including calculation locations further outside Istanbul, a particularly useful feature in a country such as Turkey where development levels differ depending on location.

The transaction is being marketed with a coupon range of 2.75% to 3.25%.

Update: The Bosphorus 1 Re Ltd. catastrophe bond has upsized by 150% to now be issuing $250m of notes on behalf of TCIP.

The price guidance coupon range has dropped during marketing to below the bottom end of the originally marketed range at 2.50% – 2.75%.

Update 2: The Bosphorus cat bond has increased in size again, leaping to $400m in size before it priced.

At the same time the pricing dropped to the bottom of the already reduced range to finish at 2.50%.

This deal has grown in size by 300% and the pricing has dropped by around 17% while it was marketed, making the reinsurance cover it provides very cost-effective for the sponsor.