Plenum estimates that the volume of catastrophe bonds in funds marketed under Europe’s UCITs label has risen roughly 49% since the end of 2022 to $13 billion at the end of September. That’s as overall issuance for 2024 looks set to hit a record $16.5 billion, according to Artemis, which tracks the insurance-linked security market
After emerging from an unusually active hurricane season with market-beating returns, catastrophe bonds are rapidly adding investors.
Despite the increase in extreme weather — 2024 marked the ninth straight season in which the Atlantic basin suffered above-average storm activity — catastrophe bonds have proved highly resilient. This year, they’re on track to return about 16%, after delivering a record 20% in 2023.
“We’ve had two fantastic years,” said Dirk Schmelzer, senior fund manager at Plenum Investments AG, a Zurich-based firm that specializes in insurance-linked securities. And that’s “attracted new money,” he said.
Plenum estimates that the volume of catastrophe bonds in funds marketed under Europe’s UCITs label has risen roughly 49% since the end of 2022 to $13 billion at the end of September. That’s as overall issuance for 2024 looks set to hit a record $16.5 billion, according to Artemis, which tracks the insurance-linked security market.
Insurers issue the bonds to pass on risks associated with extreme natural disasters to the capital markets. Investors are then called on to cover losses if a predefined catastrophe occurs, but stand to be richly rewarded if it doesn’t. Interest in the securities has been rising as climate change and urban development redraw the insurance map. Artemis estimates the total cat-bond market is now worth about $48 billion, including private market transactions.
Schmelzer said the key reasons why returns aren’t quite as high this year as they were in 2023 are the decline in Treasury rates and the rise in investor demand, which is allowing issuers to price their bonds at slightly better terms.
It’s “automatically put a little pressure on cat-bond spreads,” he said in an interview. Yields slipped from almost 14% at the end of May to about 10.3% at the end of November, according to Plenum.
Schmelzer said investors should expect “high single-digit to low double-digit returns” in 2025 unless there’s a major market shock.
Plenum said its defensive UCITS cat-bond fund, which has about $400 million of assets, generated a 12% return so far in 2024. Its dynamic fund, with about $210 million of assets, gained about 15%.
Over the past two years, holders of cat bonds have seen the average expected loss rate drop to as low as 2% from an average 2.5% during the previous three years, according to Fitch Ratings.
And it now takes a bigger catastrophe to meaningfully dent returns, a development that’s reflected in the increase of what’s known as the attachment point, which is the threshold at which a bond triggers and investor capital starts covering insured claims.
This year is set to be the hottest on record, with the average global temperature soaring to 1.62C above pre-industrial levels in November, according to the European Union-backed Copernicus Climate Change Service. That’s coincided with an unusually high level of destructive storms, with Hurricanes Beryl, Helene and Milton, as well as Super Typhoon Yagi standing out among the most devastating.
Swiss Re AG estimates that insured losses from natural catastrophes will likely exceed $135 billion in 2024, marking the fifth consecutive year in which the $100 billion threshold has been breached.