K2 Advisors stays overweight cat bonds & ILS, cites Q4 opportunities / still high yields

K2 Advisors, the hedge fund focused investment management unit of Franklin Templeton, has maintained its overweight view on the catastrophe bond and broader insurance-linked securities (ILS) asset class for the fourth-quarter, citing opportunities it sees in the market as well as the still historically high yields that are available.

The investment manager says, on ILS in general, “Despite recent tightening, the sector remains well-supported and poised for continued growth, in our view, particularly with the primary issuance slated through year end that is expected to help restart activity in the secondary market.”

As a result, “we continue to maintain our overweight outlook,” K2 Advisors said, calling the ILS asset class “an uncorrelated source of attractive carry at a time when many other spread products are trading at or near all-time tights.”

Continuing to say that, “In contrast, insurance-linked strategies offer a significant premium to traditional credit, while remaining disengaged from traditional corporate credit risk.”

K2 Advisors also sees opportunities for investment managers in ILS, saying this is due to the fact, “the asset class is still relatively inefficient, offering attractive opportunities for active trading-oriented managers.”

Despite a tightening of yields seen as the US wind season got properly underway, K2 Advisors notes that, “Catastrophic (cat) bond yields remain particularly healthy relative to history. We continue to maintain our overweight outlook in the sector, anticipating that activity will return both in the primary and secondary markets as we head into the end of 2024.”

Commenting on the investment manager’s expectation for the fourth-quarter and how much issuance the catastrophe bond market could see, K2 Advisors echos what some others have been saying, that it might not quite live up to the expectations that were being set earlier in the year.

“Based on current discussions, it appears that the fourth quarter of 2024 should be active but likely less active than the previous year, which could be explained by the record-setting first half of the year in addition to the potential that some European sponsors will not return to the market following the issuance of the prior year’s program(s), which provide multi-year capacity.

“Additionally, brokers seem to be pushing for lower layers and aggregate based transactions compared to recent years, claiming that spreads will remain elevated, with the potential to increase further, as demand continues to grow,” the investment manager explained.

K2 Advisors has made no changes to its conviction though, being overweight insurance-linked securities (ILS) as an asset class, but strongly overweight catastrophe bonds, private ILS (so collateralized reinsurance) and retrocession.

The investment manager remains neutral in its view of industry loss warranty (ILW) investments and strongly underweight life insurance-linked security investments.