A recent paper from investment manager Neuberger Berman highlights catastrophe bonds as a “very compelling opportunity” for investors seeking genuine portfolio diversification, which comes at a time when macroeconomic uncertainty and risk-asset volatility are expected to remain in focus for the foreseeable future.
Simultaneously, sponsors have also come to value capital markets as a reliable and complementary source of capacity, typically sitting alongside traditional reinsurance, the firm noted.
“In our view, this growth is still very much in its early phases, with significant future potential, while the market should be able to absorb new inflows through specialist ILS managers. In our opinion, spreads remain attractive both on an outright basis and relative to comparable fixed income asset classes. In addition, even if the conflict in the Middle East is resolved quickly, it no longer seems inevitable that interest rates will fall during 2026, making bonds without duration risk an attractive portfolio proposition,” Neuberger Berman said.
“The catastrophe bond market has ridden periods of inflationary pressure in recent years and has some relatively efficient mechanisms to help mitigate its impacts. These include annual resets, the ability of indemnity cedants to project forward their book value to incorporate inflation assumptions and the precedence for the inclusion of inflation factors in industry index deals.”
The investment manager also important highlights that projected inflation can be reflected in the pricing of new deals coming to market to ensure the paid risk spread compensates for any post-event changes in risk.
However, given the concentrated and specialised nature of the catastrophe market, this is an area where pricing power can be demonstrated, Neuberger Berman explains.
“With periods of macro uncertainty and volatility in risk assets likely to remain in investors’ focus, we believe cat bonds remain a very compelling opportunity for investors seeking genuine diversification within their portfolios,” the firm added.
Elsewhere in the paper, Neuberger Berman emphasises how cat bonds currently provide favourable spreads to investors, particularly highlighting that while the market has seen a period of spread-tightening from the elevated levels immediately following Hurricane Ian, the firm believes the market has reached a “state of balance”.
“Current spread levels are sufficiently attractive to encourage sponsors old and new to issue bonds; this is supporting further deepening of the market and broadening the covered peril region universe, allowing ILS managers to diversify their own portfolio exposure. Crucially, these spread levels are also compensating investors for the underlying risk in cat bond transactions,” the investment manager said.
However, beyond the attractive spreads currently on offer, Neuberger Berman outlines how cat bonds have historically delivered returns that are fundamentally uncorrelated to traditional financial markets, a quality, the firm saids has been showcased by recent global macro events.
“The outbreak of the Middle East conflict in February sent turbulence reverberating across financial markets, with Corporate High Yield and the S&P 500 experiencing March drawdowns of -1.2% and –5.0%, respectively, while the Swiss Re Cat Bond Index returned +0.8%. There is some potential for flows-related mark-to-market risks. This was seen in March 2020 following the outbreak of COVID-19, when multi-strategy hedge funds looked to rebalance their portfolios,” the investment manager explained.
As well as this, the firm goes on to note that the resilience of cat bonds following significant natural catastrophe events has given investors further confidence and comfort with the asset class.
“In addition to Hurricane Ian, this is reflected in results following the California wildfires of January 2025, when, despite being reported collectively as the costliest insured wildfire loss events on record, the Swiss Re Total Return index only experienced a drawdown of -0.96% in January, recovering to its high watermark in March.”
“Given the significant implications of these events for the traditional reinsurance industry, the fast recovery rate of cat bonds following Ian and only moderate drawdown following the wildfires highlight the risk-remoteness of cat bonds in a typical cedant’s reinsurance tower,” Neuberger Berman concludes.
