Cat bonds & ILS to continue growth, can exceed target returns with no losses: Twelve

Depending on the outcome of the hurricane season and the occurrence of other catastrophes, investors in catastrophe bonds could be on-track to meet or even exceed target returns in 2024, with cat bond market yields still elevated and the fundamentals of the insurance-linked securities (ILS) market strong, analysis from Twelve Capital explains.

In reviewing the first-half and looking forward to the rest of 2024, Twelve Capital, the Zurich-headquartered catastrophe bond, insurance-linked securities (ILS) and reinsurance-linked investment manager, encouragingly also makes a brief mention of a chance for expansion of the private ILS market as well.

While 2024 has seen at times interesting dynamics in the catastrophe bond market, thanks to supply-demand and other influences driving spreads, the appetite of investors continues to rise and awareness of the asset class does too.

This is helping to drive further inflows for investment managers in the cat bond space and Twelve Capital sees now sign of investor interest decreasing.

The hurricane season is a natural wildcard to cat bond market performance and growth, but still Twelve Capital forecasts a likelihood that the ILS market overall comes out growing.

Commenting on the state of the market and expectations for continued ILS growth, Twelve Capital explained, “Cat Bonds registered a positive start into 2024 and continue to show attractive gross yields. H1 2024 was marked by a buoyant new issuance activity and we expect the growth trend of the ILS market to continue, also driven by innovation in the Private ILS space.

“This shift was primarily due to elevated supply and a partially reduced investor appetite ahead of the hurricane season that is predicted to be relatively active.

“These adjustments in spreads have brought Cat Bond gross yields to levels not seen since Q4 2023 (around 15% in USD for the entire market) highlighting the continued appeal of the asset class.”

You can see that catastrophe bond market yields remain at historically high and attractive levels using our interactive chart.

In that chart, you can also see how spreads have developed through last year and over the course of the first-half of 2024.

It’s been an interesting time for the catastrophe bond market, with clear signals that capital continues to drive the trajectory of rates and value, but also that investors are remaining relatively disciplined and demanding higher spreads when required.

With the peak hurricane season period ahead, there remains uncertainty over performance and also how cat bond and ILS market dynamics behave in the latter part of this year.

Twelve Capital said, “Much will depend on the total catastrophe bill for 2024 and the development of the hurricane season. A mild season in terms of insured losses might lead to a some softening of the (re)insurance cycle and then of spreads. Conversely a particularly loss-heavy season or an increase in secondary peril losses would lead to sustained or higher spreads.

“With most of the risk premium harvested during the hurricane season, in a no-loss scenario, we expect investors to be on track to achieve returns at or above our initial expectation.”

No matter the outcome, Twelve Capital expects the catastrophe bond and wider ILS market will continue to grow over time.

The sector is in a far better position to assume losses now, given the higher attachments and more stringent terms of reinsurance and retrocessional coverage, in the main.

That puts the market in a better place, even with a potentially very busy peak hurricane season ahead.

“Under current market dynamics, we expect this popularisation of the asset class to continue. We remind investors that in case of a very active hurricane season with elevated insured losses, market conditions would be optimal for new capital to harvest attractive spreads,” Twelve Capital explained.

While commenting on ILS, as well as insurance debt and equities, the investment manager stated that, “In the absence of major natural hurricanes and unexpected geopolitical events, we see the three asset classes on track to meet or exceed the targets we set at the beginning of the year, maintaining a positive outlook for the remainder of the year.”