“Signs of hardening” highlight potentially prolonged attractive spreads: Twelve Capital

Recent “signs of hardening” in the catastrophe bond and insurance-linked securities (ILS) market have driven spreads back to their highest level in months, which investment manager Twelve Capital notes “highlight the prospects for potentially prolonged attractive spreads,” and makes for an interesting entry point to ILS for investors.

As we’ve been reporting, dynamics in the catastrophe bond market switched abruptly in April, from a spread tightening phase to one of broader spread widening across the market.

This has driven higher prices across new cat bond issuance as well and has translated into a demand for higher returns across much of the ILS market now, affecting all instruments.

Zurich-headquartered ILS investment manager Twelve Capital noted in an update that ILS market dynamics resulted in different outcomes for Florida property insurers, depending on how early they approached the market for their mid-year reinsurance renewal capacity.

Those that came to market early were rewarded, as they sought capacity during the period of greater capital imbalance and spread tightening was the trend at the time.

Vittorio Sangiorgio, Head of Investment Solutions at Twelve Capital, explained, “Floridian players that have started early with their reinsurance renewal discussions have managed to secure capacity at reasonable conditions.”

Twelve Capital noted that the tightening phase was most evident in the upper-layers of reinsurance towers, where catastrophe bonds play their biggest role.

Flattening or decreasing pricing was therefore broadly seen in these upper-layers, while still at lower-layers, or for aggregate reinsurance coverage, the market maintained its demands for higher pricing and these contracts were harder to place.

“As recent hurricane forecasts point to a potentially active season, we observe more difficulties for those market participants that were late in the process to place complex structures, Cat Bonds with industry-loss triggers or aggregate coverages,” Twelve Capital explained.

Sangiorgio noted that, “Now the market has turned,” which is being seen to most significantly affect cedants that are late in their renewal process, or trying to place complex structures, ILWs or aggregate covers.

Twelve Capital called these, “signs of hardening,” explaining that this has driven cat bond yields back to their highest levels since September 2023, as we reported last week.

The ILS manager said these signs of hardening should “be taken positively by investors,” as they highlight an opportunity.

Which Sangiorgio described as, “great news for ILS investors and an interesting entry point.”

Adding that, “Current market conditions highlight the prospects for potentially prolonged attractive spreads.”