The manager’s outlook for ILS shifted to "overweight" for Q1 from "neutral" for Q4 last year.
At the sub-asset-class level, the conviction stayed at "strongly overweight" for catastrophe bonds, private transactions and retro, and at "strongly underweight" for life securitisation. ILWs moved from "underweight" to "neutral".
K2 Advisors noted that the cat bond market has previously posted strong returns in the years following substantial losses, and that the conditions are now in place for this following Hurricane Ian.
The Swiss Re Cat Bond TR Index posted its first negative yearly performance, down 2.2%, for the year, owing to markdowns following Ian, said K2 Advisors.
It added that some price recovery had occurred as loss reports came in lower than anticipated.
The floating-rate structure of ILS further buoyed its positive outlook on the asset class.
“While it is too early to tell the overall magnitude of rate increases at the January renewal period, early indications are rate increases of 40%-60% depending on the risk tranche,” the note said.
“The cat-bond market spread remained elevated near all-time highs, combined with a significant increase in money market rates, which provides attractive total yield potential.”
It continued that for the cat bond market to support catastrophe, weather and climate-related risks, “investor needs must be met, which will include a push for higher premiums and clearer structures”.
Tighter reinsurance capacity, as well as factors that have caused market dislocations, indicated that spreads would remain elevated, it added.
“ILS instruments are priced as a spread above the risk-free rate,” it said. “With a sizeable increase in money market rates, the forward-looking total yield expectations are near the highest since the inception of the asset class.”
