Given insurance-linked securities’ (ILS) ability to offer a bounded allocation whose premium compensates for real and imperfectly correlated tail risk, a new paper by Omnigence Asset Management suggests that ILS remains one of the most credible candidates for diversification when traditional stock-bond relationships falter.
In the firm’s recently published report, executives outlined that the diversifying leg of the traditional portfolio depends on stocks and bonds moving in opposite directions, an assumption that has broken down in periods when inflation is elevated and correlations turn positive.
“Catastrophe bonds offer a return stream whose principal driver is a natural-catastrophe loss event, a factor with limited structural connection to the credit or equity cycle. Over the roughly two decades since the Swiss Re index began, the exposure has historically delivered equity-like returns with materially lower volatility, including three consecutive years of double-digit performance through 2025 as the reinsurance market repriced,” the report reads.
FULL ORIGINAL PUBLICATION HERE