Cat bond demand and spreads expected to remain elevated: Twelve Capital

Specialist investment manager Twelve Capital has said that it anticipates the increased demand for catastrophe bonds to persist and that while market spreads may compress somewhat, they are expected to remain elevated by historical standards.

Commenting on the 2024 Atlantic hurricane season that is now drawing towards its official close, Twelve Capital explained that while activity levels were below the forecasts the season was still above the long-term average.

Adding that, “Of the US landfalls, Hurricane Milton, despite its intensity, did not cause widespread damage. In contrast, Hurricane Helene, although weaker, caused significant flooding in Georgia and the Carolinas, resulting in significant infrastructure damage and economic losses.

“Warm Atlantic sea surface temperatures and a weakening El Niño pattern contributed to above-average storm activity this season. The Accumulated Cyclone Energy (ACE) index – a measure of the total energy released by storms – was higher than historical averages.”

Catastrophe losses were seen in other regions, such as the historic flooding experienced in parts of Europe and typhoons in Asia, but the impact to insurance-linked securities (ILS) markets has been minimal.

Twelve Capital explained, “Despite the increase in natural catastrophes worldwide, there were no major wind-related insured losses in the 2024 season, thanks in part to improved risk mitigation strategies and infrastructure resilience.

“As a result, the Cat Bond market remained relatively stable.”

The investment manager continued, “Looking ahead to 2025, demand for Cat Bonds is expected to remain increased. However, a combination of increased capital inflows and the relatively low losses from the 2024 season may slightly compress market spreads, which however we expect to remain elevated relative to historical averages.:

Tighter spreads are being seen in recent catastrophe bond issues, but there is an expectation that while appetites are strong, for cat bonds as investments, demand for reinsurance and cat bonds will also remain high on the cedent side of the market.

Twelve Capital further commented that, “Meanwhile, global (re)insurance losses from natural perils exceeded USD 100 billion. This figure was largely driven by secondary perils, such as severe convective storms and floods, which are likely to continue to constrain available capital in the industry and encourage disciplined underwriting practices.”

That should also feed across into the cat bond market and help in moderating spread development over time, as we move into 2025.