By Henry Gale

June 23 - (The Insurer) - Two years of strong returns for ILS funds and volatility in other asset classes have driven inflows of capital to the catastrophe bond market, with capital more than sufficient to support new and upsized issuances.

Swiss Re's index tracking global cat bond returns since 2002 recorded its highest annual returns in 2023 and 2024, significantly outstripping the rest of the last decade.

"After two record years in terms of performance in the cat bond space, a lot of investors want to get exposure in cat bonds," said Etienne Schwartz, chief investment officer for liquid strategies at Twelve Securis.

"And that means we have a lot of inflows. All the fund managers have quite significant inflows and that means all the issuances are oversubscribed."

Dirk Schmelzer, managing partner and senior portfolio manager at Plenum Investments, said he believed the increased capacity was here to stay. "I don't think that a substantial amount of the investments that we've seen now is just in for, let's say, opportunistic reasons," he said.

The first half of 2025 has also reinforced cat bonds' value proposition as a diversifying asset class. While other investments have faced shocks driven by factors such as tariff announcements from the U.S., the value of cat bonds was broadly unaffected.

Schmelzer said investors had responded differently to cat bonds during recent periods of volatility compared to past experience. In the past, he said, when there was pressure in financial markets for any reason, ILS investment managers would hear investors say they needed to sort out the rest of the investments before considering opportunities in cat bonds.

"This year it feels a bit different," he said, referring to market turmoil linked to recent tariff changes. "Interestingly enough, we did not have many investors saying, 'Look, we don't have time for a meeting right now, we first need to sort things out,'" he said. Instead, he said, investors showed more eagerness to discuss cat bonds in the midst of market shocks.

Schmelzer also described another way in which investors' attitude to the asset class had changed since previous crises.

During market volatility caused by the COVID-19 pandemic in 2020, "investors used cat bonds as a pool of liquidity and not something that they could use to hedge against the risks that they were exposed to", Schmelzer said. "Whereas this time … investors are actively seeking seeking to increase their allocation to insurance-linked securities."

The first half of 2025 so far has seen record cat bond issuance, but transactions remain oversubscribed due to the capital inflow.

"One of our biggest challenges is that we need the growth of the cat bond market in order to satisfy investor demand," Schwartz said.

Investors' appetite to back cat bonds has driven down spreads, the price at which cedants are able to secure coverage.

However, investors remain comfortable with the returns they can generate from cat bonds, Richard Pennay, CEO of Aon Securities, said. "I think it just shows that the overall supply and demand dynamic of this market is just very healthy."