Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Turkey earthquake cat bond Bosphorus grows again to $400m


According to sources in the catastrophe bond community, investors have demonstrated their appetite for a true diversifying cat bond deal and have helped the Bosphorus 1 Re Ltd. parametric Turkish earthquake cat bond jump in size again to hit $400m. The Bosphorus 1 Re cat bond began as a $100m transaction, then jumped during marketing by 150% to $250m while pricing dropped to below the originally marketed range.

Now the Bosphorus cat bond has jumped in size by another 60%, or since its launch it has upsized by a huge 300% in total, to now offer its sponsor the Turkish Catastrophe Insurance Pool (TCIP) a $400m layer of fully-collateralized reinsurance protection.

Pricing on the cat bond notes which are being issued by Bosphorus 1 Re Ltd. has dropped again we’re told. When the deal launched pricing was marketed at a price range of 2.75% to 3.25%. above the collateral investments yield. That price guidance was lowered to 2.50% – 2.75%, which equated to a drop in pricing (using the mid-points of each range) of around 13%. Now we’re told that the deal will price at the bottom of that already reduced range, at 2.50%, which is a drop in pricing of about 17% over the time the deal has been marketed.

The TCIP will be delighted with this outcome as they have secured a significant layer of reinsurance protection, much larger than had initially been expected, at a full half-a-percent lower coupon than the deal was initially marketed at. Once again, it’s testament to the attractiveness of catastrophe bonds as an asset class and catastrophe risk returns as an investment opportunity that this deal has grown so much.

It shows a much greater level of trust being placed in the capital markets by the TCIP, who previously had a small layer of cat bond cover via the Ianus Capital Ltd. transaction. It’s extremely encouraging to see this type of sponsor source what must be a reasonably large slice of its reinsurance protection from the capital markets via a catastrophe bond.

The Bosphorus 1 Re provides protection based on a parametric trigger, we wrote about the mechanics of the parametric trigger here. Parametric triggers are still less common in the ILS and cat bond market than deals using indemnity or index triggers, so it is encouraging to see this receive such strong investor acceptance. While parametric triggers can result in concerns about basis-risk for some, they definitely offer a valuable way for cat bonds to be issued in regions of the world where index data is not as common and indemnity claims may be harder to calculate. We hope the success of this cat bond will lead to more parametric cat bonds being issued in future.

We understand that the Bosphorus 1 Re cat bond will have its final pricing set later today and that the transaction will be settled next week. We assume at this late stage that there won’t be any additional movement in the size and pricing, although it can never be ruled out while the market is moving the way it currently is. So we expect the size of $400m and the pricing of 2.50% is likely to be the final figures and will update you should it change.

When this transaction completes next week it will take the total volume of completed catastrophe bond issuance to just over  $2.251 billion according to our reckoning. We will update you further when the Bosphorus 1 Re cat bond has settled next week and you can read all about the transaction in our Deal Directory.

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