The disaster bond market continues to current a compelling funding alternative, with elevated danger premiums, sturdy demand from insurers and buyers, and beneficial pricing dynamics more likely to drive file issuance in 2025, in line with evaluation by Kepler Absolute Hedge, a analysis and data-led supplier of perception into hedge fund methods.
Cat bonds delivered sturdy returns in 2024, with the peer group of UCITS funds delivering common returns of round 14%, marking the second consecutive 12 months of double-digit returns following a strong 2023.
In response to Kepler, “These returns had been delivered regardless of one other 12 months of serious international catastrophes, which though had been sufficient to impair some decrease ranges of the insurance-linked danger switch stack, precipitated comparatively de minimis losses for the securitised cat bond area.”
Furthermore, Kepler additionally famous that the “general universe” of cat bonds hit new peaks when it comes to excellent capital, largely due to sturdy new issuance, with issuance of cat bonds surging in 2024, pushed by a mixture of beneficial market situations, sustained investor demand, and a persistently exhausting reinsurance market.
Consequently, the market expanded considerably, with outstanding cat bonds nearing $50 billion in total in 2024.
“Regardless of 2024 being an lively 12 months for pure catastrophes, together with a extremely lively hurricane season, extreme wildfires, and vital storms throughout a number of areas, cat bonds encountered minimal losses resulting from restricted triggering of bond payouts,” Kepler added.
On the similar time, investor curiosity throughout the cat bond market has seen fast development in recent times, largely as a result of engaging whole returns, mixed with the “strongly diversifying nature of the return profile.”
“Given this the asset class has skilled appreciable development, notably within UCITS funds, highlighting broader institutional adoption and an increasing investor base,” Kepler famous.
Trying to 2025, Kepler defined that the majority disaster bond managers anticipate a wholesome provide of recent offers, as cedents proceed to utilise capital markets for danger switch.
“The sturdy momentum seen in 2024 has carried over into this 12 months and there already appears to be vital deal circulation within the pipeline,” the agency added.
That is partly pushed by the massive quantity of bonds maturing within the first half of the 12 months ($10 billion coming due in H1’25 vs $11 billion for FY’24).
Moreover, we just lately reported that the disaster bond market is on-track for a shocking first-quarter of exercise in 2025, with the Q1 issuance record already broken by early March and the quarter set to be one of the most active on-record for the cat bond market.
Kepler added: “Wanting ahead, cat bonds proceed to look engaging; elevated danger premiums, sturdy demand from each insurers and buyers, and chronic beneficial pricing are anticipated to maintain issuance at volumes just like and even exceeding the file ranges achieved in 2024.”
“With an interesting risk-adjusted return profile, structural trade tailwinds, and traditionally low correlations with conventional monetary markets, cat bonds supply compelling alternatives for buyers looking for each portfolio diversification and sturdy returns amid growing international disaster danger,” Kepler concludes.
