According to a new report from specialist insurance-linked securities (ILS) manager Twelve Securis, as the investment environment within ILS continues to evolve and spreads normalise from recent highs, the margin for error is narrowing, making execution quality more important than ever.The firm outlines that within this environment, sustained performance depends on deep research capabilities, a stable and independent View of Risk, careful contract design, disciplined portfolio construction and active capital rotation.“Insurance-Linked Securities (ILS) remain a structurally attractive asset class.Yet the investment environment is evolving.

As spreads normalise from recent highs, the margin for error narrows and execution quality becomes more important,” the firm’s report reads.The firm further noted: “The opportunity in ILS remains compelling.But success increasingly belongs to research-driven, actively managed platforms capable of navigating a more analytical and selective market environment.” Further into the report, Twelve Securis highlights how the ILS market experienced a significant repricing of catastrophe risk during 2023 and 2024, with capacity contraction and elevated loss experiences driving spreads to unusually high levels.

These conditions ultimately created strong tailwinds for investors, but as strong capital inflows return to the ILS market and the re/insurance sector continues to rebuild its capital buffers, pricing has stabilised, with spreads compressing back toward their long-term historical averages.“During 2023-2025, wide spreads provided investors with substantial protection buffers.As spreads tighten, that cushion naturally declines.

Performance dispersion between managers is therefore likely to increase,” Twelve Securis added.As Artemis’ readers are aware, many institutional investors gain access to the ILS market through liquid catastrophe bond allocations, often in UCITS format, which offer transparency, liquidity and operational simplicity.However, the broader ILS market extends far beyond liquid cat bonds, with additional instruments including collateralized reinsurance, industry loss warranties (ILWs), structured quota shares, and parametric reinsurance.

“Although spreads across these segments tend to move directionally together over the cycle, they rarely reprice in perfect synchronisation.A diversified ILS platform therefore provides additional flexibility in capital allocation to investors that can accommodate less frequent dealing terms than cat bonds,” Twelve Securis highlights.The ILS manager also went on to explain that within a compressing spread environment, the ability to rotate capital dynamically becomes a critical driver of performance.

The firm also outlined, that rather than keeping static exposures, ILS managers possessing a wider range of investment capabilities can modify allocations across various structures, perils, geographies, and attachment points as relative value changes.“This flexibility allows investors to respond to changing market conditions and maintain portfolio efficiency as spreads tighten,” Twelve Securis said.Additionally, Twelve Securis also acknowledges that secondary perils have gone on to become increasingly important drivers of insured losses, and how recent advances in hazard analytics and exposure datasets have significantly improved modelling capabilities.

“Most of the risks being transferred to capital markets by mean of ILS still focuses on so called primary perils, or severe and infrequent risk impacting highly populated areas with high values at risk, the typical examples being hurricane and earthquakes in the USA.Twelve Securis has historically focussed on these risks but acknowledges evolution in the modelling of several other perils,” the firm’s report reads.Adding: “Secondary perils including severe convective storms, wildfire and flood have become increasingly important drivers of insured losses.

Historically, these perils were often approached cautiously due to higher event frequency, limited historical data or lower model maturity.” However, Twelve Securis outlines that recent advances within both hazard analytics and exposure datasets have helped to significantly improve modelling capabilities.Updates to catastrophe risk models from leading modelling firms and enhanced property level data now allow investors to differentiate more effectively between attritional loss patterns, such as frequent small losses accumulating over time, and systemic secondary-peril events, which are large events capable of generating industry losses above USD 10 billion.Furthermore, whilst catastrophe models have also rapidly evolved in recent years, Twelve Securis stresses that without a stable analytical framework, managers risk allowing vendor model updates to dictate capital allocation decisions.

“A proprietary View of Risk provides consistency across model cycles.Rather than replacing third-party catastrophe models, it interprets them within a coherent analytical framework informed by empirical experience and structured stress testing.This approach also allows managers to evaluate the impact of model updates across entire portfolios before reallocating capital,” the report noted.

Despite the transition to a more balanced pricing environment, Twelve Securis states that the strategic investment case for ILS remains compelling.As spreads normalise, the sources of return shift, with performance increasingly reflecting analytical capability and portfolio discipline, which will likely progressively show more dispersion in managers’ performance.Also, following the repricing of catastrophe risk in 2023, investors within the ILS space benefited from unusually wide spreads and strong return buffers.

As capital gradually returns to the market and no major events hit the sector, this environment continues to evolve, Twelve Securis further added.“Spreads across parts of the ILS universe have compressed towards averages recorded in the two decades prior to the increase in 2022, signalling a transition from hard market conditions toward a more balanced phase of the cycle.“This shift does not weaken the strategic case for ILS.

The asset class continues to offer a distinctive source of return driven by catastrophe risk rather than traditional market, credit or interest rate risks.However, as spreads normalise, the drivers of performance change.The margin for error narrows, and investment outcomes increasingly depend on research depth, structural expertise and disciplined portfolio construction,” Twelve Securis concludes..

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