Cat bonds attractive. Elevated risk premia, robust demand could drive record issuance: Kepler
The catastrophe bond market continues to present a compelling investment opportunity, with elevated risk premiums, strong demand from insurers and investors, and favourable pricing dynamics likely to drive record issuance in 2025, according to analysis by Kepler Absolute Hedge, a research and data-led provider of insight into hedge fund strategies.
Cat bonds delivered strong returns in 2024, with the peer group of UCITS funds delivering average returns of around 14%, marking the second consecutive year of double-digit returns following a robust 2023.
According to Kepler, “These returns were delivered despite another year of significant global catastrophes, which although were enough to impair some lower levels of the insurance-linked risk transfer stack, caused relatively de minimis losses for the securitised cat bond space.”
Moreover, Kepler also noted that the “overall universe” of cat bonds hit new peaks in terms of outstanding capital, largely thanks to robust new issuance, with issuance of cat bonds surging in 2024, driven by a combination of favourable market conditions, sustained investor demand, and a persistently hard reinsurance market.
As a result, the market expanded significantly, with outstanding cat bonds nearing $50 billion in total in 2024.
“Despite 2024 being an active year for natural catastrophes, including a highly active hurricane season, severe wildfires, and significant storms across multiple regions, cat bonds encountered minimal losses due to limited triggering of bond payouts,” Kepler added.
At the same time, investor interest across the cat bond market has seen rapid growth in recent years, mostly due to the attractive total returns, combined with the “strongly diversifying nature of the return profile.”
“Given this the asset class has experienced considerable growth, notably within UCITS funds, highlighting broader institutional adoption and an expanding investor base,” Kepler noted.
Looking to 2025, Kepler explained that most catastrophe bond managers expect a healthy supply of new deals, as cedents continue to utilise capital markets for risk transfer.
“The strong momentum seen in 2024 has carried over into this year and there already looks to be significant deal flow in the pipeline,” the firm added.
This is partly driven by the large volume of bonds maturing in the first half of the year ($10 billion coming due in H1’25 vs $11 billion for FY’24).
Furthermore, we recently reported that the catastrophe bond market is on-track for a stunning first-quarter of activity 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: “Looking forward, cat bonds continue to look attractive; elevated risk premiums, robust demand from both insurers and investors, and persistent favourable pricing are anticipated to sustain issuance at volumes similar to or even exceeding the record levels achieved in 2024.”
“With an appealing risk-adjusted return profile, structural industry tailwinds, and historically low correlations with traditional financial markets, cat bonds offer compelling opportunities for investors seeking both portfolio diversification and robust returns amid increasing global catastrophe risk,” Kepler concludes.
