Solidum completes second blockchain catastrophe bond issue

Insurance and reinsurance linked investment specialists Solidum Partners has created, issued and settled a second private catastrophe bond on the blockchain, with a roughly $15 million multi-tranche transaction which we’ve added to our Deal Directory as Jungfrau IC Limited 2018.

Last year, Solidum Partners became the first to create and settle a securitised catastrophe reinsurance contract using a private blockchain, which it has named the ILSBlockchain.

That $14.8 million Dom Re IC Limited 2017 transaction saw a U.S. wind exposed collateralized reinsurance contract securitised and settled using the private blockchain, enabling investors to buy the notes transparently on the ILSBlockchain.

Solidum Partners then took the use of the blockchain for catastrophe bonds even further, arranging the first secondary ILS trade on the blockchain, which it later transpired involved the Lombard Odier ILS investment team.

For this second catastrophe bond on a blockchain, Solidum Partners created and settled seven separate tranches of notes, using the ILSBlockchain, using its transformer and incorporated cell company Solidum Re (Guernsey) ICC Limited.

One incorporated cell of the vehicle, named Jungfrau IC Limited, hosted the underlying catastrophe reinsurance contracts and acted as the issuer for the roughly $15 million of private cat bond notes.

Being a fully incorporated cell, it means the cell is the legal issuer of the notes, rather than the vehicle issuing on behalf of a cell, which helps to keep the issuer as a single legal entity unrelated to other transactions the special purpose vehicle or transformer may have issued.

This transaction saw Solidum Re Jungfrau IC Limited issue $15 million of notes, representing seven tranches of notes securitising reinsurance contracts.

The underlying reinsurance contracts are all exposed to peak zone property catastrophe risks and are from a single unnamed ceding company. The tranches of notes are a mixture of first event, second event and also ‘dead cat’ coverage.

The transaction is an efficiency way for the ceding company to secure multiple types of catastrophe reinsurance or retrocession coverage from the capital markets, with the blockchain providing an efficient mechanism for settling, clearing and distributing the notes to investors that participate in the ILSBlockchain.

All of the tranches feature indemnity triggers and represent single year reinsurance arrangements, with one year extension clauses.

The private blockchain, named “ILSBlockchain” by Solidum, replaces the role of a traditional settlement system, such as a Euroclear or DTC, so the note issuance can be settled in a peer-to-peer, efficient and cost-effective manner.

Solidum Re acted as the paying agent and common depository for the permanent global note, as well as the blockchain permission grantor and blockchain sponsor.

Investors subscribe for the notes, paying into a Guernsey trust and on the issue date Solidum Re created cryptographically-certificated Jungfrau IC notes on the ILSBlockchain, which the investors were then able to execute on delivery-vs-payment using the ILSBlockchain to acquire the newly created notes, peer-to-peer with the paying agent Solidum Re.

So the near $15 million of Jungfrau IC Limited notes now sit on the ILSBlockchain, meaning that any secondary trades would also have to be registered in the underlying distributed ledger technology. This also means all investors participating in the private blockchain have a good deal of transparency into the status of the notes at any point in time.

Interestingly, the ‘dead cat’ tranches, which provide protection in the wake of catastrophe events so are perhaps covering the potential for loss development from 2017, were previously settled via Euroclear but have now been moved to the ILSBlockchain.

Solidum Partners told Artemis that the firm continues to get enquiries from investors that are looking to access the notes hosted on the ILSBlockchain, which bodes well for future liquidity of the transactions.

The firm also said that other structuring firms in the ILS and catastrophe bond space have expressed an interest in settling via the ILSBlockchain as well. Investors already with access to the ILSBlockchain have expressed interest in purchasing some of the Jungfrau IC issuance in a secondary trade, we’re told.

This is encouraging, as it will help to make the issuance of catastrophe bonds more efficient and potentially reduce costs for sponsors.

Artemis spoke with Cedric Edmonds, Partner at Solidum Partners AG, who commented on this latest transaction, “Using the ILSBlockchain has proven simpler, quicker, cheaper for securities settlement than Euroclear. It removes entities from the process which simplifies closing as with less and less counterparties involved, turning documents, document agreement and execution become easier and quicker. When we are ready to issue, the notes are created in seconds on the ILSBlockchain and then settled seconds later with the subscriber of the notes.

“As more participants are involved on the ILSBlockchain, the liquidity for the notes increases. The technology is there for (KYC/AML-cleared) participants to directly buy and sell anonymously with each other, and then settle the notes directly with each other, all in seconds. No need for banks, their back offices and T+2 trading.

“As more issuers get involved we should see more notes on the blockchain which will draw more participants. This will drive up the liquidity of the ‘Cat Bond Lite’ issues on the ILSBlockchain, hopefully turning what has been an illiquid market into at least a market with demonstrable liquidity.”

At a time when much of the insurance and reinsurance industry is looking to technologies such as distributed ledgers and blockchains as ways to add efficiency to their business models, while reducing transactional friction, Solidum Partners have achieved something quite unique.

These transactions are among the first securities issuances to be settled using any blockchain technology and represent risk transfer and trading of catastrophe reinsurance risks at a time when other initiatives looking to leverage the blockchain within reinsurance are still in their infancy.

The example of the ILSBlockchain shows how technology can play a role in making the transfer of insurance and reinsurance risks to the capital markets more efficient. It will be interesting to see whether more traction and participation in the ILSBlockchain can be generated, as interest in these types of technologies continues to rise.

We’ve added the Jungfrau IC Limited 2018 private catastrophe bond transaction to our Deal Directory.