Swiss Re Insurance-Linked Fund Management

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Bosphorus Ltd. (Series 2015-1)

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Bosphorus Ltd. (Series 2015-1) – At a glance:

  • Issuer: Bosphorus Ltd. (Series 2015-1)
  • Cedent / sponsor: Turkish Catastrophe Insurance Pool
  • Placement / structuring agent/s: Munich Re are lead structurer. Swiss Re Capital Markets are co-structurer. GC Securities are sole bookrunner.
  • Risk modelling / calculation agents etc: RMS
  • Risks / perils covered: Turkey earthquake
  • Size: $100m
  • Trigger type: Parametric
  • Ratings: NR
  • Date of issue: Aug 2015

Bosphorus Ltd. (Series 2015-1) – Full details:

For its second catastrophe bond the Turkish Catastrophe Insurance Pool (TCIP, which is managed by Eureko Sigorta A.Ş., has registered a new special purpose reinsurance vehicle in Bermuda named Bosphorus Ltd.

The TCIP’s current cat bond, the April 2013 Bosphorus Re Ltd. parametric Turkish earthquake cat bond matures on the 3rd May 2016, so a renewal had been widely expected in advance of that date.

It had been rumoured that the TCIP was looking to make its second cat bond an indemnity trigger affair, but the lack of insurance adjusting expertise in Turkey, among other issues, likely made a parametric trigger the only option again (for the moment, as remember PCS now has a catastrophe loss data service and index in Turkey, so industry loss triggers will become a viable alternative).

For this cat bond TCIP through its Bosphorus Ltd. vehicle is seeking a new source of fully-collateralized Turkish earthquake reinsurance protection over a three-year term, according to sources.

Bosphorus Ltd. will issue and sell a single tranche of Series 2015-1 Class A cat bond notes to investors in order to collateralize an underlying reinsurance agreement between itself and the TCIP.

At the moment the transaction is being launched with a suggested minimum size of $10om of notes, but there is a good chance that number will rise significantly as the Bosphorus 1 Re deal that matures next year provided $400m of cover and the TCIP will no doubt want to replace a good proportion of that, especially if market conditions are conducive.

The Bosphorus 20151 cat bond features a parametric trigger, with the terms surrounding the trigger seemingly the same as the previous TCIP cat bond. Coverage is on a per-occurrence basis, as you’d expect with such a parametric cat bond deal.

For an earthquake to qualify as a triggering event and cause a loss it must result in spectral acceleration (a gravity based measure of ground movement and shaking from earthquakes) above 0.1g for at least 10% of the defined measurement locations and be confirmed by the calculation agent, which is risk modeller RMS.

As with the previous Bosphorus cat bond this new 2015-1 deal is focused on earthquakes affecting the Istanbul region of Turkey, where the highest concentrations of insured exposures lie for the TCIP.

The initial attachment probability for the Bosphorus Ltd. Series 2015-1 notes is said to be 2.04%, the initial exhaustion probability is 1.09% and the initial expected loss 1.5%.

Those figures are higher than the previous TCIP cat bond, suggesting that there is an increased exposure in the covered area or that the calculation approach to the parametric index differs slightly to cover a slightly more risky layer of TCIP’s reinsurance program needs.

The calculation process features an index which is derived from the spectral acceleration and the number of calculation locations, applied to a factor to represent the exposure level.

The $100m of Bosphorus 2015-1 Class A notes are being marketed to ILS investors with price guidance of 3.5% to 4%, we understand.

Last year’s Bosphorus 1 Re cat bond had an initial expected loss of 1.01% and paid investors a 2.5% coupon, giving a multiple of 2.48 times the EL.

This new Bosphorus 2015-1 cat bond, with its expected loss of 1.5% and coupon range of 3.5% to 4%, would offer investors a multiple of 2.33 at the lower end of price guidance, or 2.67 times at the upper end.

We understand that there are historical earthquake events which when simulated with models could have caused a loss of principal to this cat bond, but none of these were within the last hundred years.

Update 1:

The Bosphorus Re 2015-1 cat bond is said to be set to complete at up to $200m in size.

At the same time as upping the target for the bond, the price guidance dropped to below the original range and narrowed to 3.25% to 3.5%.

With an initial expected loss of 1.5%, the Bosphorus 2015-1 cat bond looks set to complete offering investors a multiple of between 2.17 and 2.33 times EL.

Update 2:

The Bosphorus 2015-1 cat bond settled at just $100m in size, the lower end of the TCIP’s target.

However the pricing settled at the low-end of the reduced guidance range, at 3.25%. That’s a multiple of just 2.17 times the initial expected loss of 1.5%.

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