According to Joseph Tolen, Senior Investment Director in the Credit Investment Group at Cambridge Associates, the insurance-linked securities (ILS) market “continues to be attractive and should deliver strong returns in 2025.”
In a recent report for Cambridge Associates, Tolen wrote that, “demand for additional catastrophe coverage from insurers has kept the market firm, which has ultimately provided sufficient cushion for reinsurers and ILS managers to absorb risk.”
This is clearly showcased with ILS managers achieving remarkable returns in 2023 and 2024, despite there being a notable rise in severe storms across the US Midwest, with multiple hurricanes making landfall, and major flooding taking place across Europe.
Tolen notes that “the sustained hard insurance market, combined with the uncorrelated nature and diversification benefits of investing in ILS, make 2025 an attractive opportunity for investors.”
He added: “Several factors have supported the insurance market, which has improved ILS pricing and resulted in more favorable terms and conditions for investors.
“Premium increases following Hurricane Ian and balance sheet losses on the back of a particularly challenging year for traditional assets in 2022 created a capital shortage for reinsurers, limiting their ability to provide coverage for insurance companies.”
Tolen went on: “Conversely, demand for protection from insurance companies has sharply increased due to high rates of inflation in recent years and the need for broader coverage, largely related to climate change.”
Elsewhere in the report, Tolen suggested that supply/demand imbalance will continue to be seen throughout 2025.
He states that additional supply will be available from reinsurers and ILS managers following two solid years of performance, however this is expected to be offset by continued demand for coverage from insurers, especially on the back of hurricanes Helene and Milton, which struck Florida in late 2024.
“These factors will keep the insurance market firm, leading to more attractive pricing for investors and giving them additional cushion to absorb losses, even if 2025 sees higher-than-average catastrophe events,” Tolen said.
Tolen underlined that when considering opportunities, terms and conditions will be crucial towards ILS performance success.
“We favour managers that are meticulous in portfolio construction and appropriately invest in line with their stated risk/return profiles regarding attachment points and where they sit in the capital stack, perils, trigger mechanisms, geographies, and so on.
“Doing so will help mitigate exposure to risks associated with climate change, put investors in the best position to absorb losses from events, and help maximize returns,” he concludes.
