Schroders Capital has posted strong early-year performance across its core catastrophe bond portfolios, benefiting from a deliberate underweight to wildfire risk that helped mitigate losses tied to the severe Los Angeles wildfires in January.
“The European winter season passed without any severe windstorms, while in the cat bond market the primary issuance pipeline has been very strong, with a close to record amount of issuance in Q1 and continued heavy issuance into Q2,” Gibson said.
Going back to the Los Angeles wildfires, Gibson highlighted how the event caused insured losses estimated between $30 billion and $40 billion, with some spillover into ILS.
“On the downside, the Los Angeles wildfires in January caused insured losses estimated between $30 and $40 billion, some of which made their way to the ILS market. The impact was modest but notable in the wider cat bond market, with the Swiss Re Global Cat Bond TR Index showing -0.85% performance in January,” Gibson added.
“This compares with performance that was much closer to, or above, 0% in our core cat bond portfolios. This outperformance in turn reflects the fact that Schroders Capital funds are deliberately underweight exposure to the peril of wildfire, principally due to the team’s more cautious view of this risk than that proposed in the marketing materials of affected bonds.”
In the private ILS space, Gibson said the more severe impact has been concentrated in higher-risk strategies and proportional vehicles like sidecars.
“So far there has been little reported in the public domain, but we expect this to materialise at some point,” he added.
On market pricing dynamics, Gibson noted that spread multiples have declined as capital flows into the sector, although the pace of compression has eased in recent months.
“More broadly, spread multiples reduced during 2024 and leading into 2025, as fresh capital was attracted to the ILS market. This resulted in a more balanced market from a supply and demand perspective,” said Gibson.
“The strong pipeline of primary issuance, and the impact of the Los Angeles wildfires, caused the rate of reduction in spread multiples to reduce.”
“The market has shown pricing discipline in recent weeks and spread multiples have settled at a level which is, while lower than the record levels of the last two years, still attractive compared to long-term levels,” Gibson concluded.
