While catastrophe bond yields have been on the decline for a number of years now, private bank and asset manager VP Bank AG continues to give the insurance-linked securities asset class a neutral weighting, noting that loss-free yields still remain above average.
VP Bank has been particularly positive on the inclusion of catastrophe bonds and ILS within investor portfolios for their diversification benefits, with this continuing to be the driver for many allocators to the sector.
While the yields to maturity of new catastrophe bond and ILS issuance have been falling over the last three years, which you can analyse in our chart displaying Plenum Investment’s cat bond market yield data, the return potential of the asset class continues to compare favourably with other far more correlated and less diversifying investment categories.
In his latest update to investors, VP Bank’s Dr. Felix Brill, Chief Investment Officer, continues to urge allocators to “stick to diversification” and despite the froth being seen in equity and IPO markets believes that clients should “stay invested without getting carried away.”
But, indicating that he feels diversification remains very important in investors portfolios, Brill cautions that against the backdrop of the excitement of record IPO’s like the recent SpaceX, “as good as it feels: the ground is closer than it seems.”
VP Bank maintains a neutral stance on all alternative investments indicating allocations should be maintained, from a portfolio construction view, highlighting insurance-linked securities alongside hedge funds, gold, industrial metals and real estate.
The private bank also warns that inflation is likely to continue to rise, with interest rate hikes the most likely direction of travel as a result.
In catastrophe bonds and other ILS which are floating rate instruments, of course increasing interest rates can drive higher returns to the risk-free component of the collateral underpinning these instruments, helping to insulate them somewhat from broader financial dynamics (although of course inflation can affect values-at-risk).
Commenting on the outlook for cat bonds and ILS through this year’s Atlantic hurricane season, VP Bank highlights that “the occurrence of the El Niño phenomenon offers hope for a year with low losses.”
However, the private bank qualifies that statement by noting on tropical storm forecasts, “These figures reflect the number and intensity of storms, but not the risk of them making landfall. Even a single event can cause significant damage in densely populated regions.”
Previously VP Bank said that it views catastrophe bonds and insurance-linked securities as the “best asset class from a diversification perspective,” offering significant benefits to investors as a component of their portfolios.
