Cat bonds including Canadian coverage totalled $2.8 billion in first nine months of 2017: PCS

Sponsors raised $2.8 billion through catastrophe bond transactions that included Canada, “the most robust year in catastrophe bond market history,” Property Claims Services (PCS) said in a new report.

Bigger and More Mature: PCS Q3 2017 Catastrophe Bond Report was released on Wednesday by PCS, a Verisk Analytics business.

The report said that sponsors completed seven cat bonds with coverage for Canada in the first nine months of 2017. The first, in Q1, was the second of two Galilei Re transactions, raising $525 million in capital. In the second quarter, two Kilimanjaro Re issuances included coverage for Canada, with $1.25 billion in aggregate limit, followed by Spectrum Capital at $430 million and Northshore Re at $350 million. Riverfront Re included Canada in an indemnity-triggered transaction using PCS for independent catastrophe designation. Finally, Fortius Re, completed in the third quarter, includes Canada and uses an indemnity trigger.

Overall, unsurprisingly, cat bond issuance was quiet in the third quarter. “Expect in years where second-quarter transactions have spilled over to July, this tends to be the case,” the report said.

Sponsors completed two cat bonds last quarter, resulting in US$40 million in new limit and bringing the year’s total issuance to nearly US$9.3 billion, up 148% year-over-year. “Year to date, that’s a record,” PCS said in the report. “Of course, with the first half of 2017 representing the busiest full issuance year in catastrophe bond market history, each subsequent transaction pushes the market into the record territory.”

Sponsors completed 31 transactions in the first nine months of the year, up from only 16 in 9M 2016. Average transaction size rose to nearly US$300 million, a year-over-year increase of 28%. PCS reported that 28 of the 31 cat bonds completed so far this year had exposure to North America, with six including Canada. MultiCat Re, covering Mexico only with a parametric trigger, was the only transaction of the quarter that did not include any risk in the United States.

Related: Cat bonds with coverage for Canada in the first half of 2017 totalled $2.7 billion: PCS

Use of PCS data in cat bonds climbed significantly year-over-year for the nine-year period. From US$1.9 billion in the first half of 2016, use surged to US$4.5 billion, an increase of nearly 140%. Five use the PCS Catastrophe Loss Index (US$2.6 billion), with another seven using PCS for independent catastrophe designation (US$1.9 billion). Neither of the transactions completed in the third quarter use PCS.

The report said that use of PCS for independent cat designation remained unchanged for the year, with no third-quarter transactions taking that approach. Sponsors have raised US$1.9 billion so far this year with triggers that use PCS for independent catastrophe designation.

Regarding cat bond lite, sponsors completed 13 such transactions to raise nearly US$500 million in the first nine months of 2017, with three coming in the third quarter. Last year saw 10 cat bond lites completed (US$423 million). Third-quarter issuance reached US$94 million, down from US$122 million for the same period last year, the report said, adding that triggers for all three transactions completed in Q3 were not revealed publicly.

“Perhaps the most interesting cat bond lite of the year came in the third quarter from Solidum Partners,” PCS suggested. Dom Re IC Limited 2017 provides US$14.8 million in protection to an undisclosed cedent and uses an indemnity trigger. What makes this transaction unique, though, is that it was completed on a blockchain platform, PCS reported. This follows a proof of concept in the summer of 2016 for an index-triggered transaction by another market participant (this one using the PCS Catastrophe Loss Index).

“Blockchain has been contemplated in the reinsurance and [insurance-linked securities (ILS)] community because of a number of benefits its afford around management expense reduction, permanence of data, and efficiency of transactional execution upon a triggered event,” PCS said in the report. “It’s been reported that blockchain-enabled reinsurance and ILS protection have the potential to significantly reduce frictional costs. PCS will continue to watch the use of blockchain closely and support a wide range of industry initiatives that seek to build blockchain platforms for the benefit of the sector.”