ILS demonstrates diversification & resilience so far in 2024: Sangiorgio, Twelve Capital

The insurance-linked securities (ILS) asset class has demonstrated the benefits of diversification it can offer to investors and also its resilience to global events so far in 2024, according to Twelve Capital’s Head of Investment Solutions, Vittorio Sangiorgio.

With global events hitting the headlines constantly in 2024 so far, the ILS and catastrophe bond asset class has once again demonstrated the beneficial alternative source of returns it can offer investors, while also showing the asset class has become more resilient as well.

Vittorio Sangiorgio, Head of Investment Solutions at specialist investment manager Twelve Capital, explained in a recent update that the ILS asset class has been unaffected by geopolitical and economic upheavals.

“Uncertainties around the timeline and size of central banks’ actions on rates and geopolitical tensions in the Middle East have negatively impacted global fixed income and equity indexes in recent weeks,” Sangiorgio said.

“In this context, ILS continue to record positive and uncorrelated returns as shown by a 5% gain of the Swiss Re Cat Bond index in the first 16 weeks of 2024,” he added.

Of course, ILS transactions do not cover such events and derive their returns largely from catastrophe risk premia paid by the insurance and reinsurance industry. Hence they exhibit a relative lack of correlation to the major geopolitical and financial events that affect the world.

But 2024 has not been without its major catastrophe events, Sangiorgio noted, although for the ILS asset class these are manageable so far.

He explained that, “While several catastrophic events were recorded in 2024, their losses seem manageable. The Taiwan earthquake estimates dropped to USD 0.5-1bn, while the losses related to the Baltimore bridge collapse should be well distributed amongst a large pool of reinsurers.

“Lastly, loss-creeps from the Italy hailstorm in 2023 highlighted the impact of inflation and underestimated average claims in areas where loss-creeps were typically not a trend.”

With catastrophe bonds and other ILS instruments typically attaching higher up, so responding only to larger loss events, 2024 has so far been relatively free of impacts for many ILS and cat bond investment strategies.

Looking ahead, the most notable threat of the year for the catastrophe bond and broader ILS market is always the US hurricane season.

With forecasts suggesting a very active 2024 hurricane season ahead, the industry is watching developments in the Atlantic basin closely.

Sangiorgio noted that, “Climate and meteorological conditions, including a current sea surface temperature well above recent history, are conductive to a potentially high hurricane activity in the 2024 Atlantic season. However, the timeline and “strength” of La Niña will play an important factor.”

Further adding that, “Still, hurricanes are a random process and, in order for ILS investors to be impacted, decently sized hurricanes have to hit a populated area in order to generate insured damage.”