Catastrophe bonds: close to 9% yield and decorrelation in times of volatility
05-06-2026, 07:10:00
- Manager of Twelve Securis Cat Bond fund and CIO Liquid Strategies
- Twelve Securis
In a scenario of geopolitical uncertainty and financial volatility, catastrophe bonds stand out as one of the few strategies capable of offering returns decorrelated from traditional markets. Etienne Schwartz, CIO Liquid Strategies at Twelve Securis and manager of the Twelve Securis Cat Bond Fund, analyzes the current attractiveness of this asset class and the opportunities they continue to find in the market.
In a context of growing geopolitical uncertainty, market volatility and concerns about global growth, what role can catastrophe bonds play in a diversified portfolio today?
Catastrophe bonds are there basically to provide uncorrelated returns. In my opinion, they are one of the few instruments that are not affected by, for example, geopolitics, the conflict in Iran that we are currently seeing, or, to some extent, interest rate volatility. In fundamental terms, what we do is assume insurance or reinsurance risk in most cases, and we basically operate like an insurance and reinsurance company. Only if a previously defined natural catastrophe event occurs do we, as investors, have to pay. And if nothing happens, we don't have to pay. So, if Trump suddenly decides to do something, for example in Iran, from a financial point of view it doesn't affect us much, because our returns are not correlated with those financial markets. Only if that previously defined natural event occurs, typically hurricane or earthquake risks, does the payment materialize.
After a record year for catastrophe bonds in 2025 and a solid start to 2026, with strong demand and a tightening of spreads, are investors still adequately compensated for the risks of this asset class and are catastrophe bonds still attractive?
Absolutely. We are no longer at the risk premium levels we saw before. That is the compensation we receive for assuming this underlying insurance risk. We are no longer where we were in 2023, 2024, or even 2022. But even so, if we look at the financial markets in general and compare it to high yield and other corporate debt, we are still in a very attractive position, with a current yield of approximately 9% in US dollars. I think it remains a very solid value proposition, especially considering its uncorrelated nature.
Although often described as uncorrelated, catastrophe bonds are not risk-free. How have they performed during periods of market stress (inflationary shocks, interest rate volatility, or equity market downturns) and what are the main risks investors should be aware of?
Exactly. They are not risk-free, and that is a very important point. Catastrophe bonds mainly cover major natural catastrophes, typically hurricane or earthquake risk, although they can also include other risks like wildfires or severe convective storms. But only if these events occur is capital at risk. If there is equity volatility, it doesn't affect us much, because that doesn't cause hurricanes or earthquakes in California. So we are really not correlated with those market movements. The only risk we assume is that underlying reinsurance and insurance risk. That is really the core of the entire strategy.
Twelve Securis Cat Bond and differences from other catastrophe bond strategies
Twelve Securis's catastrophe bond strategy stands at around 6.5 billion. That is the pool of assets we manage within a total of approximately 9.5 billion. Our strategy is quite simple from a top-down approach. We focus on natural catastrophe events and risks. We do not invest in other risks such as cyber risk, which is a growing segment within the ILS market, nor in risks like terrorism or other uncorrelated risks that are also gaining weight.
We focus on natural catastrophes because we believe that is what our investors expect and, furthermore, where we can obtain the best risk-adjusted returns over the long term. Specifically, we primarily seek exposure to risks in the United States, especially earthquakes in California and hurricanes in Florida. The reason is quite simple: they are the risks that offer the best premiums and, at the same time, the best modeled. When we model risks like hurricanes or earthquakes, we have much more certainty compared to what we call secondary risks, such as wildfires or severe convective storms. These are events we read about daily in the newspapers, like floods in Spain or the UK, or severe storms in the United States.
Regional diversification
Our focus is on the so-called peak perils (the most extreme catastrophe risks with the greatest economic impact). Not because we don't like diversification, but because in most cases diversification involves a lot of uncertainty in modeling. If our internal models show that it is not worth taking that diversification risk, we stick to the risks that pay best and are best modeled. And those are US hurricane risk and earthquake risk. There is diversification. We are not solely invested in those risks, but there is an underweight relative to the market, simply because most deals that provide diversification either offer lower returns or are not as well modeled.
How does climate change affect the catastrophe bond asset class?
Climate change is one of the most relevant issues for this asset class. In a way, it also contributes to the relatively high return premium obtained today. Without its impact, premiums would probably be quite lower. However, the important thing is that climate change is not an enemy for us. If we are able to model it—and that largely happens in the case of hurricanes—we can properly incorporate it into decision-making. And in the case of earthquakes, moreover, there is no direct impact from climate change, so in that sense the exposure is more stable. Ultimately, the key is that the risk is well remunerated, and that is the main point. The situation is different for secondary risks, such as wildfires, where the quality of modeling is lower and the impact of climate change is much more relevant. The same applies to floods or hailstorms. In those cases we are more cautious when investing.
Investment process of the Twelve Securis Cat Bond strategy. How is expected return, modeled loss, liquidity, and diversification balanced?
Yes, the positive aspect is that we have very sophisticated models behind the entire process, in which we perform stochastic analysis of the portfolio. This allows us to understand, bottom-up, what happens when we incorporate a given risk: what is its contribution to total risk and what factors it is exposed to. From there, the work consists of building a well-diversified portfolio. For example, we do not just support insurers in Florida; we can diversify with an insurer that operates only in Texas, another in Louisiana, and another with greater exposure in the northeastern United States. That is where the portfolio manager's role comes in, seeking the best risk-adjusted return. In addition, we have a solid governance structure and a risk management team that continuously monitors liquidity risk in the funds. And that, in my opinion, is one of the key factors of our success: having a complete investment process, from start to finish, within a very institutionalized and well-controlled structure.
Looking ahead, what are the main opportunities and risks that investors should watch for in the catastrophe bond market in the coming years?
There is only one fundamental risk, although there could be several associated risks, such as hurricanes or earthquakes. At the core, the underlying risk in our strategy is natural catastrophes. And at the same time, that is also the opportunity: we are paid to take that risk. Moreover, it is not an adverse selection. That is, it is not that we receive the worst risks from insurance or reinsurance companies; on the contrary, they need to transfer some of those risks because they have too much concentration on their balance sheets. And that is where we come in as investors in the capital markets, taking on those risks and obtaining an attractive premium in return.
The most delicate part, in my opinion, is that market growth can also come with what we could call "bad risks." But even that can be an opportunity, because we have the ability to analyze and distinguish which risks are appropriate and which are not. I mentioned earlier, for example, cyber risk: from our point of view it is not the most appropriate type of risk for the fund, although it is also part of the market's evolution. In any case, this also poses a challenge for investors, who must choose among different capital providers and select the right manager in this space, which can sometimes be complex.
