VP Bank stays neutral on cat bonds, notes quiet hurricane season and hedging costs

Despite the fact premia has reduced in the catastrophe bond market, private bank and asset manager VP Bank AG maintains a neutral weighting on insurance-linked securities noting that the Atlantic hurricane season is currently running its course loss free, although also highlighting the expensive cost of currency hedging.

VP Bank has remained positive on the inclusion of catastrophe bonds and ILS within investor portfolios for their diversification benefits, seeing the value persisting even as yields have declined.

Yields to maturity of new catastrophe bond and ILS issuance have declined over the last three years with the softening of reinsurance pricing, which you can analyse in our chart displaying Plenum Investment’s cat bond market yield data, but for VP Bank the return potential of the asset class continues to compare favourably with other far more correlated and less diversifying investment categories.

In its latest view on the markets, VP Bank highlights that it continues to maintain a neutral weighting on the ILS asset class, which means it is maintaining allocations and continues to view the independence from broader capital markets as a positive source of returns for its portfolios.

On the positive side, VP Bank notes that the Atlantic hurricane season remains “extremely quiet” having seen over 80% of the season pass before the first hurricane Isaias formed.

“2026 is the first season since the introduction of satellites 60 years ago to have entered October without a hurricane,” the investment firm noted.

Adding that, “In the Pacific, by contrast, this was only the second time ever that three hurricanes were active simultaneously. For the cat bond market, however, this had had little impact, so far,” and noting that storms to-date there have not attached the parametric cat bond in Mexico.

Also seen as positive is the fact that interest rates are rising, which of course can boost the risk-free rate of return on the collateral underpinning catastrophe bonds and other ILS instruments.

On why VP Bank is neutral, rather than positive, this comes down to the fact that premia have reduced after a run of virtually claim free years.

But additionally and for the first time that we’ve noticed, VP Bank also highlights the expensive cost of currency hedging associated with investments into cat bonds and ILS.

Now, this does not affect all investors, but those needing to hedge currencies in certain countries can find that as spreads decline the cost of hedging begins to weigh on their decision-making with respect to an asset class like ILS.

Previously VP Bank said that it views catastrophe bonds and insurance-linked securities as the “best asset class from a diversification perspective,” offering significant benefits to investors as a component of their portfolios.