A new commentary report from Morningstar DBRS says catastrophe bonds have performed well for investors over the past 10 years when compared to U.S. Treasuries, and they expect investor demand for catastrophe bonds to grow. The first insurer in Canada to capitalize on this demand is TD Insurance, which launched the country’s first catastrophe bond in January 2025, increasing its capacity to provide property insurance coverage in the country.
According to Morningstar DBRS, the bonds were first developed to increase available capital to pay claims following Hurricane Andrew in August 1992 and the Northridge Earthquake in 1994. “The issuer of the CAT bond receives funding only if a specific catastrophic event that meets predetermined metrics covered by the CAT bond occurs. These are high-yield debt instruments, with maturities ranging from one to five years,” the ratings firm writes in its report, TD’s CAT Bond Issuance: A Step in the Right Direction for Canada’s Property and Casualty Insurance Industry.
Provides additional protection
The TD bond, worth $150-million over three years until Dec. 31, 2027, provides the insurer with additional protection apart from its reinsurance program, to cover earthquakes and severe convective storms during the three year term. “The debut issuance by TD 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,” Morningstar DBRS writes. “The bond issuance timing seems appropriate, given that Canadian property and casualty insurers experienced their worst-ever year for insured severe weather-related losses in 2024.”
When TD first issued the bond, representatives told the Insurance Portal that the effort to provide additional capacity from more diversified capital sources, builds resiliency in the company’s reinsurance program.
“Severe convective storms are part of the standard homeowner’s policy,” they stated. “We are focused on being there for our customers during their time of need and it is through innovative activities, like this bond, that we are able to do that.”
