Despite tightening, cat bond spreads still around 280bps above US high-yield: Twelve Capital

Despite the tightening of catastrophe bond spreads seen through the second-half of 2024 the asset class remains elevated compared to US high-yield bond offerings, with investment manager Twelve Capital estimating cat bond spreads are around 280bps higher at this time.

The investment manager said 2024 was “an exceptional year for the asset classes in which Twelve Capital specialises.”

Commenting on the range of asset classes Twelve Capital allocates to on behalf of its investor base, which include catastrophe bonds, private insurance-linked securities (ILS), insurance and reinsurance equities and debt, the company said strong performance was seen across the board despite a challenging macroeconomic backdrop.

Summarising 2024 performance, Twelve Capital explained, “Cat Bonds delivered an impressive 17.6% return in USD, marking the second-highest annual performance since the Swiss Re Cat Bond Index was established in 2002. This was driven by record-high spreads, elevated collateral returns due to rising risk-free rates, and minimal natural catastrophe losses despite an above-average Atlantic hurricane season.

“European Insurance debt returned 7.9% in EUR, reflecting robust resilience amid macroeconomic and geopolitical volatility. This performance was supported by significant spread tightening, continued inflows into credit strategies, and an anticipation of interest rate normalisation.

“Insurance Equity gained 21.8% in USD, driven by bullish market sentiment, consistent earnings growth, and attractive dividend yields.”

Looking ahead to 2025, the investment manager said it continues to see “attractive opportunities”, but noted that “tighter spreads and higher valuations across asset classes suggest increased downside risk.”

The company explained, across the asset classes it covers, “Cat Bonds: After some tightening in 2024, spreads were at around 585bps in the first week of January 2025. Attachment points and contract wording remain strong, and spreads remain around 100bps above the averages recorded in 2016-2021, where we experienced a softer market. When comparing Cat Bonds to US high-yield, Cat Bond spreads are around 280bps higher.

“European Insurance Debt: Despite the strong rally in 2024, Tier 2 spreads around 160bps indicate continued attractiveness relative to bank and corporate debt. Opportunities in subordinated RT1 debt are particularly notable. While fixed income spreads generally appear tight, we expect continued strong investor appetite for segments of the market, such as Insurance Debt, that offer attractive risk-adjusted returns.

“Insurance Equity: Dividend yields remain among the top three in European equities, supported by strong solvency levels. Reinsurance stocks also stand out, benefiting from prudent underwriting and reserve buffers built up during the hard cycle.”

The fact catastrophe bond spreads remain historically high compared to the softer points of the reinsurance cycle and comparably to other asset classes much higher, suggests investor interest will persist and aligns with forecasts for a strong year of inflows to the ILS asset class in 2025.