Catastrophe bonds allow insurers to pass on extreme risks, such as those related to earthquakes or hurricanes, to financial market investors, and are seen as an alternative to reinsurance.
Issuance of so-called cat bonds has been increasing over the past five years as insurers and reinsurers look to spread their risk and raise capital from investors to protect themselves against the world's most extreme natural disasters.
Cat bond issuers make regular interest payments to the bondholders, and, if no catastrophe-related losses are incurred, return the capital once the notes expire.
Four cat bonds have been issued so far in 2013, totaling nearly USD 1 billion in protection for global natural catastrophes and mortality risk. In addition, a further three bonds - including the TCIP transaction - totaling another USD 900 million are being marketed, including a USD 300 million bond covering U.S. earthquakes from State Farm, the largest U.S. home and auto insurer.
Standard & Poor's assigned a BB+ rating to the Class A Series 2013-1 notes to be issued by Bosphorus 1 Re Ltd, the credit rating agency said on Tuesday.
The transaction is the second to protect the Turkish Catastrophe Insurance Pool from natural disasters after the world's biggest reinsurer, Munich Re, sold a 50 million euro (USD 64.19 million) bond in 2009 on the pool's behalf.
Around 96 percent of Turkey is prone to some degree of earthquake risk, according to the World Bank - resulting in the country's government introducing a compulsory earthquake insurance scheme in 2000.
For this latest transaction, Munich Re is helping to structure the Bosphorus bond - which will protect the insurance pool from earthquakes in the Istanbul region for three years.
Investors in cat bonds will consider Turkish earthquakes a "diversifier," as cat bonds predominantly cover the most extreme natural disasters in the United States, Japan and Europe. These include hurricanes, earthquakes and windstorms.
Investors like to spread the money they invest in natural disaster risk into different perils and geographies - or diversifiers - to avoid losing all their money if a huge natural disaster causes high insurance losses in one area.
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TURKEY seeks to shift risk to investors in quake insurance scheme
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