Key Takeaways
- • Joseph Tolen, Senior Investment Director in the Credit Investment Group at Cambridge Associates, says the insurance-linked securities (ILS) market "continues to be attractive and should deliver strong returns in 2025."
- • ILS managers posted remarkable returns in 2023 and 2024 despite severe US Midwest storms, multiple hurricanes making US landfall, and major European flooding.
- • A sustained hard insurance market, driven by reinsurer capital shortages after Hurricane Ian and 2022 traditional-asset losses, has improved ILS pricing and investor terms.
- • Tolen expects supply/demand imbalance to persist through 2025, with new capital from reinsurers and ILS managers offset by continued insurer demand following Hurricanes Helene and Milton.
- • Tolen favors managers who disciplined portfolio construction, attachment points, perils, trigger mechanisms and geographic diversification, citing terms and conditions as crucial to ILS performance.
Summary
Cambridge Associates expects the insurance-linked securities market to deliver strong returns in 2025, according to a recent report by Joseph Tolen, Senior Investment Director in the Credit Investment Group at Cambridge Associates. Tolen wrote that demand for additional catastrophe coverage from insurers has kept the market firm, providing sufficient cushion for reinsurers and ILS managers to absorb risk. He pointed to remarkable ILS manager returns in 2023 and 2024, achieved despite a notable rise in severe storms across the US Midwest, multiple hurricanes making landfall, and major flooding across Europe.
Tolen attributed the improved pricing and more favorable terms for investors to several factors. Premium increases following Hurricane Ian, combined with balance sheet losses from a challenging 2022 for traditional assets, created a capital shortage for reinsurers and limited their capacity to provide coverage. At the same time, insurer demand for protection has sharply increased due to high inflation in recent years and the need for broader coverage, largely linked to climate change. Tolen described the sustained hard insurance market, together with the uncorrelated nature and diversification benefits of ILS, as making 2025 an attractive opportunity for investors.
The report expects the supply/demand imbalance to continue through 2025. Additional supply is expected from reinsurers and ILS managers after two solid years of performance, but this is likely to be offset by continued insurer demand, particularly following Hurricanes Helene and Milton, which struck Florida in late 2024. Tolen said these conditions will keep the insurance market firm, supporting attractive pricing and giving investors additional cushion to absorb losses, even if 2025 sees higher-than-average catastrophe events.
Tolen stressed that terms and conditions will be decisive for ILS performance. Cambridge Associates favors managers who are meticulous in portfolio construction and invest in line with stated risk/return profiles, including attachment points and position in the capital stack, perils, trigger mechanisms and geographies. In Tolen's view, this discipline helps mitigate exposure to climate-related risks, positions investors to absorb event losses, and supports return maximization.
Tolen attributed the improved pricing and more favorable terms for investors to several factors. Premium increases following Hurricane Ian, combined with balance sheet losses from a challenging 2022 for traditional assets, created a capital shortage for reinsurers and limited their capacity to provide coverage. At the same time, insurer demand for protection has sharply increased due to high inflation in recent years and the need for broader coverage, largely linked to climate change. Tolen described the sustained hard insurance market, together with the uncorrelated nature and diversification benefits of ILS, as making 2025 an attractive opportunity for investors.
The report expects the supply/demand imbalance to continue through 2025. Additional supply is expected from reinsurers and ILS managers after two solid years of performance, but this is likely to be offset by continued insurer demand, particularly following Hurricanes Helene and Milton, which struck Florida in late 2024. Tolen said these conditions will keep the insurance market firm, supporting attractive pricing and giving investors additional cushion to absorb losses, even if 2025 sees higher-than-average catastrophe events.
Tolen stressed that terms and conditions will be decisive for ILS performance. Cambridge Associates favors managers who are meticulous in portfolio construction and invest in line with stated risk/return profiles, including attachment points and position in the capital stack, perils, trigger mechanisms and geographies. In Tolen's view, this discipline helps mitigate exposure to climate-related risks, positions investors to absorb event losses, and supports return maximization.
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