While the 2025 Atlantic hurricane season is projected to be more active than average, the fundamentals of the insurance-linked securities (ILS) market remain strong, according to François Divet, Head of ILS at AXA Investment Managers (AXA IM).
“Hurricanes in the Atlantic basin, especially those that make landfall in the US, represent the most significant risk exposure for the Cat Bond market,” Divet explained in a recent commentary.
“The number and intensity of these storms, and more importantly where they strike, can greatly influence insured losses and the performance of ILS portfolios. As a result, hurricane season forecasts are one input that can be incorporated into pricing, portfolio construction, and risk modelling,” he continued.
A number of meteorological agencies currently project that the 2025 hurricane season will be active, though not as extreme as the hyperactive season in 2024.
Two main climate drivers are behind this outlook.
First, Atlantic Sea surface temperatures (SSTs) remain unusually warm, a key factor, as warm water acts as fuel for hurricanes, supporting both their formation and intensification.
Second, ENSO conditions are currently neutral. The El Niño–Southern Oscillation (ENSO) affects wind patterns in the Atlantic, and neutral conditions (neither El Niño nor La Niña) tend to reduce wind shear, making it easier for storms to develop and strengthen.
Across the various forecasts that we’ve seen issued so far for the 2025 season, the average projection calls for 16 named storms, 8 hurricanes, and 3 major hurricanes.
However, Divet highlights a critical point, noting that historical patterns and risk simulations reveal that more storms do not necessarily translate into higher insured losses.
The 2024 season demonstrates this.
“While it featured 11 hurricanes, only two (Helene and Milton) made major landfall in the US, resulting in less than $40 billion in insured losses – well below initial projections,” Divet explains.
“In fact, historical data shows a weak correlation between the number of hurricanes and the level of insured losses. A single powerful landfalling storm in a high-density area can cause more damage than a dozen weaker ones that remain offshore.”
“Given this uncertainty, we rely on catastrophe models based on Monte Carlo simulations. These simulate hundreds of thousands of possible hurricane seasons, varying the frequency, strength, path, and landfall location of storms to estimate likely outcomes,” Divet continued.
Divet also highlights how AXA IM uses adjusted models based on Verisk’s AIR Worldwide platform to account for current climate signals, which ultimately helps refine key risk metrics such as expected loss, excess spread, and value-at-risk (VaR).
Using updated 2025 hurricane forecasts, AXA IM’s models show a modest increase in expected loss, around 15% above the base case. Yet yield premiums remain strong, with the yield-to-EL multiple above 4x.
“While the 2025 Atlantic hurricane season is shaping up to be more active than average, the fundamentals of the ILS market remain strong. Our forecasts shows that investors are well compensated for each unit of expected risk. Thanks to careful modeling, broad diversification, and disciplined portfolio construction, investors can access attractive returns – without taking undue risk,” Divet added.
Concluding: “As climate volatility becomes more rooted, the ILS asset class continues to stand out. It offers an appealing combination of yield, diversification, and low correlation to traditional markets – making it a compelling opportunity for those prepared to manage its unique risks.”
