Insurance
Home›Insurance›Industry & Deals›VP Bank says cat bond yields remain above average desp…
VP Bank says cat bond yields remain above average despite declines
The bank maintains a neutral alternative allocation stance, citing diversification benefits as inflation risks rise and rate hikes could lift returns on floating-rate ILS.
Catastrophe bond yields have fallen for several years, but VP Bank AG continues to give insurance-linked securities, including cat bonds, a neutral weighting for investors, arguing that loss-free yields still remain above average. In its latest investor update, VP Bank’s Dr. Felix Brill, chief investment officer, said the asset class continues to compare favorably versus more correlated categories, even as yields to maturity on new cat bond and ILS issuance have declined over the last three years. The bank also highlighted cat bonds and ILS as a key diversification tool for portfolio construction.
VP Bank remains constructive on including catastrophe bonds and other ILS in portfolios, in part because they are designed to behave differently than traditional markets. Brill urged allocators to “stick to diversification” and said clients should stay invested without becoming “carried away,” even as equity and IPO markets show signs of froth.
The private bank also warned that inflation is likely to continue rising, with further interest rate hikes the most likely direction of travel. It noted that many cat bonds and ILS are floating-rate instruments, so higher interest rates can increase returns to the risk-free portion of the collateral backing these products, though it cautioned that inflation can still affect values-at-risk and that storm metrics do not guarantee landfall risk.