The Turkish Catastrophe Insurance Pool (TCIP) now benefits from a $400m layer of fully-collateralized, parametric earthquake reinsurance protection thanks to the completion of its Bosphorus 1 Re Ltd. catastrophe bond on Friday. The deal, which increased in size by 300% from $100m to the $400m it settled at is the second time that the TCIP has had cat bond cover in force, although with this deal cat bonds play a much larger role in its reinsurance coverage.
Previously, the TCIP benefitted from a small layer of cat bond cover via the Ianus Capital Ltd. transaction. With Bosphorus 1 Re the TCIP demonstrated its own willingness to tap the capital markets for reinsurance cover more directly. It has been encouraging for the cat bond market to watch a parametric triggered transaction upsize so much and for the pricing to reduce significantly showing investors appetite for a diversifying opportunity in what has been an indemnity focused market of late.
The Bosphorus 1 Re Ltd. cat bond will provide the TCIP with a three-year source of fully-collateralized reinsurance protection against earthquakes affecting Turkey, predominantly focused on events around the Istanbul region. Coverage from the Bosphorus cat bond is on a per-occurrence basis, and for an earthquake to qualify as a covered event it must meet defined criteria within the parametric trigger which we explained more about in this article.
The parametric loss trigger designed for the Bosphorus 1 Re cat bond is based on data reported by KOERI, or a back-up agency likely to be the USGS. For an earthquake to qualify as a covered event under the terms of the cat bond it must be a quake with a date of loss during the cat bond risk period that results in a spectral acceleration greater than 0.1g for at least 10% of the defined calculation locations, as confirmed by the calculation agent.
The cat bond proved popular in the market and as well as increasing in size by 300% during the marketing phase the pricing on the transaction dropped by around 17% from the mid-point of the range it was originally marketed at, 2.75% to 3.25%, down to a new range of 2.5% to 2.75%, before settling with a coupon of 2.5%. Clearly investors felt the use of a parametric trigger was not off-putting and we understand that the deal was widely invested in by a global group of cat bond specialists and some pension funds.
Rating agency Standard & Poor’s assigned its ‘BB+ (sf)’ issue credit ratings to the $400 million variable-rate principal-at-risk series 2013-1 class A notes issued by Bosphorus 1 Re Ltd. on Friday. S&P noted that it is the first time it has rated a transaction using RMS’s Europe Earthquake Model for Turkey.
S&P also noted the use of a periodic payment deposit account by the TCIP, into which it will make payments to ensure against an inability to pay investors coupon payments. It will seed this account with 190 days worth of premium. S&P note that the deposit account ensures that scheduled interest for two accrual periods can be paid, even if the transaction was to terminate early because the TCIP had failed to pay its reinsurance premium.
The Bermuda Stock Exchange admitted the Bosphorus 1 Re Ltd. principal at-risk variable rate note program and the $400m Series 2013-1 Class A principal at-risk variable rate notes to its official list. The listing sponsor was Appleby Securities (Bermuda) Limited.