Cat bonds - natural diversification for sophisticated investors

It is always very valuable to get the chance to talk to real specialists in the funds business. Florian Steiger from Icosa Investments AG, Pfäffikon SZ, is an absolute expert in the field of cat bonds. We met on Wednesday, 15.01.2025, at the offices of MRB Fund Partners AG between Paradeplatz and Lake Zurich. The topic is quite complex, but Florian had a lot of patience and showed me the details. His success is extremely pleasing and proves his company right: in its first financial year, the funds boutique has already attracted over 300 mio. US Dollars in new money for the strategy and the future looks excellent. Thomas J. Caduff, CEO, Fundplat LLC

• Caduff: Mr. Steiger, your area of expertise is cat bonds. Could you explain what these are?

We are convinced that there is no better diversifier than cat bonds. Florian Steiger

Steiger: Cat bonds a type of insurance-linked security that transfers the risk of natural disasters (such as hurricanes or earthquakes) from insurers to investors who, in turn, receive an attractive yield for taking on this risk. Cat bonds have a relatively long history dating back to the 1990s, and over that time, they’ve built a strong track record of offering excellent risk-adjusted returns. One of the main reasons investors are drawn to cat bonds is that they are largely uncorrelated with traditional financial markets – making them an effective portfolio diversifier. Today, we see a variety of sophisticated investors participating in cat bonds, including family offices, pension funds, endowments, and other sophisticated institutional players.

• Caduff: Can you please describe the current environment for cat bonds?

The fact that we have raised more than 300 mio. US Dollars in AuM in our first year shows that there is significant demand for such a strategy. Florian Steiger

Steiger: The environment for cat bonds is excellent. Although spreads have been normalizing slightly in recent months, they still offer a compelling relative value when compared to more traditional asset classes – especially given the high valuations we’re seeing in equity markets. Right now, the difference between cat bond spreads and the equity risk premium is near historical highs and we are convinced that there is no better diversifier than cat bonds. The fact that we have raised more than 300 mio. US Dollars in AuM in our first year shows that there is significant demand for such a strategy.

• Caduff: How is the Icosa strategy positioned compared to its peers?

Steiger: The Icosa strategy aims to harvest the systemic return component of cat bonds while minimizing idiosyncratic risk, to the extent that this is possible. In practice, that means we focus on a risk premium approach rather than making big bets on specific events or geographies. Our conviction is that a strategy aligned with the overall market will perform significantly better than portfolios, which are positioned either overly aggressive or too defensive. We aim to constantly improve our data-driven, science-based investment process to identify broad market trends, rather than hinging on a few high-conviction trades that could introduce unwanted idiosyncratic risk. This approach sets us apart from peers who might take on more concentrated bets or who ignore the possibility that insurance models might not adequately capture the economic risk. Essentially, our goal is to provide investors with a systematic strategy that seeks robust, repeatable returns throughout various market conditions.