Insurance and reinsurance linked investment specialists Solidum Partners have completed a private catastrophe bond transaction, a $14.8 million Dom Re IC Limited 2017, which has become the first such securitisation to be settled using a private blockchain.
The transaction was issued using Solidum Partners Guernsey-domiciled transformer vehicle Solidum Re (Guernsey) ICC Limited, with one cell named Dom Re IC Limited hosting the underlying reinsurance contract and acting as the issuer for the $14.8 million of notes.
It’s the first example of a catastrophe bond securitisation of insurance risk that has been digitised onto a private blockchain to facilitate the process of settlement. In fact this is believed to be the first securities settlement process using the blockchain that isn’t just a proof-of-concept.
The private blockchain, named “ILSBlockchain” by Solidum, has effectively replaced the role of a traditional settlement system, such as a Euroclear or DTC, providing a peer-to-peer way to manage settlement of the note issuance.
The transaction saw Dom Re IC Limited issue $14.8 million of notes, due 2023, representing a securitisation of a reinsurance contract, to 6 investors, which are all ILS funds.
The underlying reinsurance contract, a mid-year renewal, features U.S. wind risk from an unnamed ceding company.
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 then subscribed for the notes paying into a Guernsey trust and on the issue date Solidum Re created cryptographically-certificated notes on the ILSBlockchain, which the investors were then able to execute on delivery-vs-payment on the ILSBlockchain to acquire the newly created notes, peer-to-peer with the paying agent Solidum Re.
So that means the notes now effectively sit on the ILSBlockchain, meaning that any secondary trades would also have to be registered in the underlying distributed ledger technology.
Solidum said that secondary traders can become participants on the ILSBlockchain in order to acquire notes and broker-dealers could also sign onto it, in order to facilitate trades between participants.
So it’s not quite the same as “a blockchain cat bond” might be seen, as this is in reality a cat bond that has been reflected in the blockchain to enable settlement to be effected in a more transparent, lower cost and more efficient manner.
But, in that and other respects this is truly groundbreaking, not least because this could be the first real-world securities settlement using any blockchain, but because this is a niche financial market and it involved market participants collaborating to achieve the syndicated investment in the notes.
Cedric Edmonds, partner at Solidum Partners and a director of Solidum Re, came up with the idea to use a blockchain and actually developed and implemented the ILSBlockchain and surrounding structural mechanics himself, said that Dom Re required an alternative to Euroclear as it was becoming increasingly difficult to access Euroclear efficiently for smaller private placement ILS issuances.
“It was a case of necessity being the mother of invention!” Edmonds commented, “Without the excellent support and highly flexible services of the service providers in Guernsey, most notably Artex who picked up the baton at a late stage from another service provider and then ran amazing swiftly with it, completing this would not have been possible – my thanks go out to them.”
Edmonds told Artemis that the use of the blockchain for ILS or catastrophe bond settlement enabled a number of costs to be reduced and provided for a much lower-friction settlement process.
The ILSBlockchain provided a financial saving, as it takes the use of a settlement system and certain trust banking fees out of the equation. It also reduced the settlement time to a matter of seconds over what can be days.
It also positioned Artex Risk Solutions, who more typically manages an ILS structure and helps to facilitate transactions, in an less typical role of trustee through its Artex Risk Solutions (Guernsey) Limited unit, which could also likely increased efficiency of having manager and trustee roles shared.
Paul Eaton, Business Development Director of Artex, commented; “It has been a great experience to work alongside Cedric and Solidum for this innovative transaction which makes best use of Guernsey’s strengths and demonstrates the range of services that Artex is able to offer our clients.”
Edmonds explained that he sees the ILSBlockchain as an open platform that other ILS market participants would be welcome to use and an initiative coming from inside the industry that could add efficiency to the transaction process for the entire ILS market.
For Solidum Partners itself it also shows a willingness to work in partnership with other ILS funds and managers, on a project that could benefit the entire industry. Additionally, it could provide the investment manager with a way to enter into larger deals, by pulling other ILS funds and managers alongside it to augment available capacity, helping to increase its relevance in the marketplace.
It’s a good news story for Guernsey as well, with the domicile taking a lead on use of the blockchain for a securities settlement transaction.
Mark Helyar, non-executive director of Solidum Re and Of Counsel, Bedell Cristin, also said; “I am delighted that Solidum Re ICC has concluded this latest transaction. It is not an exaggeration to describe the new Dom Re IC structure as a ground breaking, global first, not only for the ILS sector but for dematerialisation of listed securities generally. Guernsey is once again the jurisdiction of choice for innovation in the ILS sector and I anticipate this model will be widely adopted.”