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Bosphorus catastrophe bond a real success story, says Turkish cat pool


As we wrote earlier this week, the Bosphorus 1 Re Ltd. catastrophe bond completed recently, successfully securing its sponsor the Turkish Catastrophe Insurance Pool (TCIP) a source of fully-collateralized, multi-year reinsurance protection against Turkish earthquake risks using a parametric trigger. Now the usual press releases on the deals completion have emerged and it’s clear that the TCIP sees the cat bond deal as a huge success.

Bosphorus 1 Re is the first cat bond that the TCIP has directly accessed the capital markets to sponsor. It had been the beneficiary of some protection from the 2009 Ianus Capital Ltd. transaction which was actually sponsored by reinsurer Munich Re but covered a reinsurance agreement with the TCIP.

So the Bosphorus cat bond breaks new ground for the TCIP, vastly increasing the amount of reinsurance protection it receives from the capital markets to $400m after this cat bond deal quadrupled in size since it launched. The Turkish catastrophe pool is clearly pleased with the results, judging by comments published in two press releases from Munich Re who acted as lead structuring agent on the transaction and from GC Securities who acted as co-structuring agent and bookrunner.

Munich Re, who acted as lead structurer on the transaction, said that with the completion of Bosphorus 1 Re TCIP has acquired $400m of reinsurance protection for Turkish earthquake risks with a statistical return period of approximately one event per 100 years. Munich Re also assisted with the collateral arrangements for the transaction. Its asset management arm MEAG established a fund investing in short-dated US treasury bills which will hold the cat bond collateral and pay investors a variable rate of interest on top of the deals 2.5% coupon.

Georg Daschner, the member of Munich Re’s Board of Management responsible for Europe and Latin America, said; “We are pleased to have again assisted our client TCIP with a capital markets transaction as an additional tool for managing its risks. This transaction is a further demonstration of how Munich Re offers its clients the full spectrum of risk transfer solutions.”

GC Securities, the capital markets division of broker Guy Carpenter, acted as sole bookrunner and joint structuring agent on the cat bond.

Cory Anger, Global Head of ILS Structuring at GC Securities, highlighted some of the important and unique aspects of this cat bond; “This transaction highlights the acceptability and flexibility of capital markets-based risk transfer capacity to accept and strongly support bespoke trigger solutions (including for relatively new regions / perils for the capital markets) to meet the specific needs of cedents – in this case, TCIP. The parametric trigger structure was tailored to correlate with TCIP’s exposures and estimated losses from earthquakes affecting the Istanbul region. The transaction flexibly allows TCIP to annually update the triggering formula to reflect changes to TCIP’s exposures and expand the coverage within the Istanbul region.”

Chi Hum, Global Head of ILS Distribution at GC Securities commented on ILS investor acceptance of the deal; “The capital markets investor support for Bosphorus Re/TCIP was deep enough to enable an issuance upsize to $400,000,000 at favorable pricing. The breadth of investor composition will give TCIP the support it needs to determine how best to integrate and optimize capital markets capacity into its total reinsurance purchase program. We are honored to have been instrumental in assisting the TCIP in arranging this alternative capacity for the benefit of the policyholders and citizens of Turkey.”

Nick Frankland, CEO of Guy Carpenter, EMEA commented; “This transaction is a testament to the groundbreaking and collaborative work that has been carried out by the TCIP and its local partners. By entering the capital markets with such a significant and well received first issue, TCIP has clearly demonstrated its credentials to the reinsurance and capital markets as well as its determination and desire to further privatize its earthquake risk. GC Securities, Guy Carpenter’s broking team is proud to have partnered TCIP with this game changing transaction and to have been able to deliver a solution that best meets TCIP’s growing risk transfer needs.”

Comments made by executives at the TCIP show that the catastrophe pool is delighted with the way the Bosphorus 1 Re cat bond transaction came to market and was accepted by a broad group of investors. They see the deal as a real success story for the insurer and clearly see the capital markets and catastrophe bonds playing an important role in its reinsurance program going forwards.

Süha Cele, Executive Vice President at operating insurer Eureko Sigorta A.Ş. and responsible for reinsurance affairs at the TCIP commented; “We are happy that Bosphorus was well received by the capital markets. Bosphorus is a real success story for TCIP.”

Ismet Güngör, Coordinator of TCIP at Eureko Sigorta, added; “In view of the constantly growing portfolio of TCIP we see the capital markets as a complement to our traditional reinsurance coverage. Bosphorus proved the availability of Turkish earthquake capacity in the capital markets. As our cat bond program is now well established, we are looking forward to approaching the capital markets as a diversification of our reinsurance channels in the future.”

Süha Cele added; “TCIP was pleased with the capital markets’ receptivity to a Turkey earthquake cat bond issuance. As TCIP continues to grow due to recent legislation changes, diversifying the source of our risk transfer capacity at a competitive price is necessary. Additionally, the parametric trigger can allow TCIP to receive payment quickly in order to bolster our claims paying capacity.”

For such a cat bond, using a parametric trigger and featuring risks that aren’t familiar with many ILS and cat bond investors, to have received such strong support from the capital markets is very encouraging for the sector. While parametric triggers aren’t to everyone’s liking, some investors continue to dislike the basis risk that is inherently present, there is a growing acceptance of them in the marketplace. There is now sufficient appreciation of parametric triggers and appetite for catastrophe risk for a cat bond such as this to upsize significantly and secure cover at a very attractive rate-on-line for its sponsor. That can only be positive for the continued expansion of the catastrophe bond market going forwards.

You can read full details on this catastrophe bond in our Deal Directory here: Bosphorus 1 Re Ltd.

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