Florida attractive, as it trades above overall cat bond market spread: Tenax Capital

Tenax Capital, the London based asset manager that operates a UCITS cat bond strategy, considers Florida exposed catastrophe bonds more attractive now, seeing improvements in the insurance environment there and an excess spread available for its allocations, compared to cat bonds for certain other regions.

A year ago, Tenax Capital was carefully watching Florida insurance and reinsurance market developments and was encouraged by the claims experience associated with 2024 hurricanes, which has encouraged the investor to allocate more capital to cat bonds covering the state in 2025.

Artemis spoke with Tenax Capital insurance-linked securities (ILS) portfolio managers Toby Pughe and Marco della Giacoma to learn more about their growing confidence in Florida.

Pughe began, “In our view, Florida remains attractive from both a pricing perspective and due to its continuously improving legal environment. While last year we preferred to stay on the sidelines — waiting for a test of the new regulatory framework and to ride out the anticipated active hurricane season — we now consider Florida wind an attractive risk to add to the portfolio.

“It has always been a ‘marmite’ state, but it’s undeniable that the wind is currently in the carriers’ sails. The relatively low industry losses from Milton and Helene exemplify this. Depending on how you clean the data — Florida is still trading about 100–150 bps above the overall market spread.”

della Giacoma, continued, “Because of Florida’s concentrated risk, investors are always going to be wary. But we’re more concerned about states with relatively poor risk standards, where even a low industry loss could trigger bond defaults or significant mark-to-market volatility. Whether it makes sense to add lower-quality risks simply because they aren’t in Florida – or because a fund is of a size where it’s required to do so – is up for debate.”

Further explaining the Tenax strategy Pughe said, “Index bonds have tightened, and there will always be someone at the back of the room shouting, “But I can’t keep fattening my tail!”. But, if the choice is between overweighting tail risk or taking on what we typically describe as frequency risk (e.g., secondary perils or poorly modelled risk), the decision ultimately comes down to balancing return stability (historically speaking) with the potential for unexpected volatility from frequency risk.”

Overall, Tenax Capital remains encouraged with the state of the catastrophe bond market, but believes that discipline must be maintained.

“Although spreads have tightened over the past 12–18 months, the most important factor for us is that the underlying terms and conditions remain healthy,” della Giacoma told us.

“We don’t mind sacrificing a bit of premium as long as these terms remain favourable.

“Our focus is on maintaining discipline throughout the cycle and avoiding the rinse-and-repeat mistakes the market tends to make.”