Cat bond funds can deliver high single to low double-digit returns in 2025: Schmelzer, Plenum

With catastrophe bond market yields still elevated by historical standards, Dirk Schmelzer, Head Portfolio Manager for ILS / CAT Bonds and a Partner at Plenum Investments AG, believes catastrophe bond funds can deliver high single-digit to low double-digit returns in 2025, on a no loss basis.

Looking ahead to next year, Schmelzer explained that the “favourable environment” for catastrophe bonds is expected to continue.

“Although spreads came down recently in the primary market, the market continues to trade at comparatively high risk-spreads,” Schmelzer said.

Adding, “This is due to the fact that, even though demand for cat bonds is strong at the moment, the large amount of new cat bond issuances coupled with the loss activity in 2024 tends to maintain the current spread levels in the market.”

Over recent weeks, primary catastrophe bond issues have seen their pricing come in lower than guidance in many cases, while issuance sizes have increased allowing sponsors to secure more reinsurance or retrocession than initially anticipated in many cases.

While there is an indication of some price softening in the cat bond market, issuance dynamics are also being driven by cash levels among fund managers, from maturities and coupon earnings, as well as some fresh capital inflow to the sector.

All of which has made for very attractive issuance conditions for sponsors, but also a growing range of new investment opportunities for cat bond fund managers.

Looking to 2025, Schmelzer projected that, “In combination with the yield on US money market investments, a high single-digit to low double-digit performance in USD on a no-loss basis, i.e. in the absence of major insured natural catastrophes, should be achievable.”

While this would be lower than returns achieved by some cat bond funds this year and certainly lower than the 2023 record returns that were seen, this is in no way a return to the depressed spreads seen in the past and cat bond fund returns are expected to remain at historically very attractive levels, it seems.

Schmelzer is also very positive on current market dynamics in the cat bond space, seeing a busy issuance pipeline as beneficial to managing cat bond fund strategies.

“Moreover, with new sponsors entering the cat bond market and, in particular the increasing number of cat bonds covering non-US risks, the market offers increasing diversification potential,” Schmelzer said. “Hence allowing us to enhance the diversification of the fund.”

As a reminder, the UCITS cat bond fund sector is currently averaging at 12.57% return for 2024 to the end of November, according to Plenum Investments Index of that now more than $13 billion market segment.