With TD Insurance (TDI) successfully sponsoring the first catastrophe bond covering only perils in Canada this year, the debut issuance from the organisation could potentially make cat bonds more attractive to other Canadian insurers in the future, according to analysts at Morningstar DBRS.
In January, TD Insurance, part of Canada’s TD Bank group, priced its CAD $150 million debut MMIFS Re Ltd. (Series 2025-1) catastrophe bond deal.
This marked the first catastrophe bond solely exposed to natural perils in Canada that we’ve ever analysed and tracked in our extensive Deal Directory.
The MMIFS Re 2025-1 cat bond provides TD Insurance with three years of fully-collateralized reinsurance cover from the capital markets, protecting it against losses from the perils of earthquakes and severe convective storms (SCS).
In a new report, analysts at Morningstar DBRS noted that the timing of the bond issuance “seems appropriate,” given that Canadian property and casualty insurers witnessed the worst-ever year for insured severe weather-related losses in 2024, as well as the approaching spring thaw, which increases the risk of flooding across the country.
“CAT bond issuance has grown over the years, and these bonds are now an established form of alternative risk transfer for the insurance industry,” Morningstar DBRS said.
Looking back, catastrophe bond and related insurance-linked securities (ILS) market issuance of $4.5 billion recorded in the fourth-quarter of 2024 was sufficient to take the full-year total to a record $17.7 billion, while the outstanding market reached a new all-time-high of $49.5 billion, Artemis’ latest quarterly cat bond market report shows.
So far in 2025, almost $3 billion of cat bonds have been issued according to Artemis’ data, which marks a strong start to the year for the catastrophe bond market.
“Global economic and insured losses from natural catastrophes have increased over the years, driven by factors such as inflation, coastal population growth, and a climate change-induced increase in the severity of catastrophic storm systems, especially in the U.S. This has increased the adoption of CAT bonds as an instrument that can complement traditional reinsurance and provide an extra layer of protection,” Morningstar DBRS adds.
Analysts also explained that data from the Swiss Re CAT Bond Index shows that catastrophe bonds have performed well compared with U.S. Treasuries over the past 10 years on a risk-adjusted basis.
“We expect investor demand for CAT bonds to continue to grow, especially since CAT bonds have a low correlation to returns for traditional financial assets, as returns for CAT bonds are dependent on the occurrence/nonoccurrence of a specific natural catastrophe,” analysts said.
Adding: “For issuers, CAT bonds provide a unique opportunity to reduce their catastrophe exposure without entering into a reinsurance contract that needs to be renewed yearly, which enhances predictability.
“Typically, CAT bonds are fully collateralized and are issued through a special-purpose vehicle (SPV), and the collateral helps mitigate counterparty credit risk. The proceeds from the issuance are invested in low-risk, liquid, and high-credit-quality securities, which act as collateral and are held in a trust account. The proceeds from the issuance are paid out to the issuer through the SPV if a natural catastrophe covered by the bond occurs and the bond is triggered.
“However, if a covered catastrophe does not occur, investors make a return through a combination of the interest earned on the invested securities plus the cost of the reinsurance protection offered by the SPV.”
In TDI’s case, the $150 million that was raised for its debut cat bond will be invested in Canadian dollar-denominated European Bank for Reconstruction and Development notes.
In addition, the cat bond issuance provides TDI with additional protection apart from its reinsurance program against the adverse effects of earthquakes and severe convective storms in Canada for a three-year term, from January 1st, 2025, to December 31st, 2027.
“TDI could also reap some other intangible benefits such as enhanced brand recognition and a reputation for innovation, being the first insurance company in Canadian history to successfully issue a Canada-specific CAT bond,” Morningstar DBRS notes.
“The debut issuance by TDI could make CAT bonds more attractive to other Canadian insurers. Since CAT bonds are effectively collateralized reinsurance, they can also help free up or strengthen insurers’ regulatory capital positions, potentially helping improve their credit profiles.”
Victor Adesanya, Vice President, Global Insurance & Pension Ratings, added: “Since CAT bonds are effectively collateralized reinsurance, they can also help free up or strengthen insurers’ regulatory capital positions, potentially helping improve their credit profiles.”
