The elevated level of investor interest in cat bond strategies is continuing to hold, according to sources, as managers signal that allocators are gradually coming off the sidelines and putting money to work in the segment.
Bonds have remained relatively untroubled by the year’s named storms Beryl, Debby, Francine and Helene, with the impacts of Hurricane Milton not yet known. Sources have indicated that a major hit that strengthened the rate environment could yet result in capital inflows.
At least six new cat bond funds have started up since June 2023, with at least one more understood to be in the works to launch before the end of the year.
“The emergence of these funds is about utilising distribution channels to target and grow the market with structures that are attractive investors, as opposed to doing something different that will have a material impact on investor return,” a broking source told Insurance Insider ILS.
Matthew Barret, partner research firm Kepler Partners, said the ILS investor base had “expanded into the wholesale end, with wealth managers, asset managers and fund of funds looking at the space because the opportunity set is so rich.”
Meanwhile, Joe Tolen, senior investment director at consultancy Cambridge Associates, said the firm had seen “a decent amount of interest from endowments and foundations, and private practices”.
He added that cat bonds offer a “good pathway” into the ILS market for investors unfamiliar with the asset class.
“Investors who previously hadn’t invested in the market and aren’t as familiar with the market naturally tend to dip their toes into cat bonds because of the liquidity and transparency that they offer,” Tolen said.
The 2023-24 fund launches have been helped by ILS’s returns story, with bond strategies outperforming private ILS funds over the past five years, even as returns from both segments rocketed in the post-Hurricane Ian market.
Pure cat bond strategies generated cumulative returns of 30.5% over the past five years, according to the Eurekahedge ILS Advisers Index.
Over the 24 years since December 2000, the Aon Securities Cat Bond Total Return Index has outperformed benchmarks including the Bloomberg US Corporate High Yield Bond Index.
“The strong returns have made the overall investor proposition more attractive, which has led to the establishment of these new funds,” said one ILS broker.
The new funds in turn broaden the investor base, driving increased capital flow into the market and creating new opportunities for managers and capital providers.
This expanding capital base is also seen as supporting the forward pipeline.
So far, issuance has largely matched demand, with H1 new issuance of $12.3bn setting an industry record.
New and existing ILS investors have a growing appetite for bonds
On the ILS manager side, drivers of the fund launches have been to shore up assets under management and grow fee income, by expanding offerings to existing investors and onboarding fresh capital.
The new fund offerings from Aeolus and Hiscox were designed at least partly to capture inflows from existing investors with an emerging appetite for cat bonds, according to sources.
Several of the 2023-24 cat bond fund launches reflect managers looking to expand the geographic reach of their investor base.
Schroders targeted the US market with its June 2023 launch of Cayman Islands-domiciled Schroders Capital Coda Fund.
Stephan Ruoff, global head of ILS at Schroders Capital said it was a “significant milestone” for the firm’s ILS division as it continues to build its brand in the US. Schroders investor base has historically been located in Europe.
Traversing the Atlantic in the other direction, Fermat has sought to tap European investors with the Februrary launch of Ireland-domiciled Fermat UCITS Cat Bond Fund.
The strategy added $530mn in AuM in the period from its launch to the end of May.
Meanwhile, Leadenhall partnered with Australian investment firm Bennelong to target Australian and New Zealand investors with its new cat bond strategy, LCP Insurance Linked Securites Fund.
In January, the firm secured $100mn from Australian pension fund Challenger Group for a pure cat bond strategy.
The Icosa Cat Bond Fund launched in January by Florian Steiger has taken a “data-driven and more opportunistic view of risk,” Steiger noted.
The fund’s AuM had reached $200mn as of August.