Hurricane Helene was particularly devastating. It formed off the U.S. East Coast near Yucatán and made landfall in Florida at the end of September. As a Category 4 storm, the second-highest level, it brought wind speeds of 225 km/h (140 mph).

Helene left behind many casualties and widespread destruction. At least 189 deaths have been reported, with a particularly high number of victims in North Carolina, South Carolina, and Georgia. Many towns are cut off, and two million people are without power or phone service.

A Focus at Zurich-based Twelve Capital

Helene is considered the most intense storm of the year so far and the fifth of this year's Atlantic hurricane season. It also caught the attention of Twelve Capital at their Zurich headquarters.

The independent investment manager specializes in insurance sector investments, particularly catastrophe bonds, known as Cat Bonds.

These financial instruments were developed in the 1990s in response to major natural disasters to help insurers manage exceptional losses. The true catalyst was Hurricane Andrew in 1992.

Hurricane Andrew Was a Crisis for Many Insurers

Andrew swept through Florida and Louisiana, causing extensive damage. At the time, a lack of adequate reinsurance coverage led to nearly a dozen insurance companies in the U.S. going bankrupt, leaving about a million policyholders without coverage.

This spurred the idea of placing reinsurance risks on the capital markets. Today, these securitizations are referred to as insurance-linked securities (ILS).

A Rapidly Growing Market, Accelerated by Climate Change

For investors, Cat Bonds are an attractive portfolio addition due to their low correlation with traditional financial markets. The market for liquid Cat Bond instruments has grown steadily over the past two decades. The total market size, estimated at approximately $40 billion as of 2023, is expanding rapidly.

The market is dominated by Cat Bonds that cover hurricane damages in the U.S.

«It's still a relatively small market, but it's growing nicely,» says Urs Ramseier, co-founder and CIO of Twelve Capital. One driver of this growth is the widening protection gap—the difference between economic and insured losses—due to climate change.

Switzerland as a Growth Driver

«Premiums have risen by 10 to 15 percent in recent years,» says Ramseier. Twelve Capital is positioned to capitalize on this growth, managing over $5 billion in assets and ranking among the top players in the ILS sector. Growth markets for new investors include Switzerland, Germany, the UK, Australia, and the U.S.

Twelve Capital has the potential to further strengthen its standing. At the end of July, the Zurich company and Securis Investment Partners, a London-based ILS asset management specialist, announced their intention to merge. Ramseier sees the merger as an opportunity to offer a broader range of ILS solutions. With around $8 billion in combined assets under management, Twelve Capital and Securis would become one of the world’s top ILS providers. The transaction is still subject to approval.

Attractive Risk-Return Profile

The primary risk with Cat Bonds is the occurrence of a predefined catastrophe. If such an event happens, investors may lose their investment either partially or entirely, as the capital is used to cover the insurance claims. Despite the losses incurred over the past two decades, the Cat Bond market has achieved an average annual return of around 7 percent during this period. In the record year of 2023, returns reached 15 to 20 percent.

If the current hurricane season doesn't bring any significant major loss events, long-term average returns could surpass expectations, as they did last year. Current damage estimates for Helene are in the mid-to-high single-digit billion-dollar range. However, uninsured losses are expected to be significantly higher.

No Cat Bond Defaults Expected Yet

At present, Twelve Capital does not anticipate any Cat Bond defaults. However, there could be capital erosion in some aggregate bonds. Apart from the wind damage in the Big Bend region, most losses are expected to fall within deductibles for named storms.

But things could change quickly. Hurricane Milton is already moving toward the southeastern U.S., posing a potential new threat.