Cat Bonds: What Allocators Need to Know Now

Catastrophe bonds (cat bonds) have moved from niche to mainstream allocator tool. Record primary supply in 2025—$10.5bn in Q2 alone and a $54–56bn outstanding market mid-year—reflects insurers’ demand for alternative capital and investors’ search for diversifiers that aren’t driven by equity or rate cycles. Total ILS “alternative capital” reached ca. $121bn over the 12 months to June 2025, underscoring the depth and resilience of the ecosystem.

At the same time, insured catastrophe losses remain structurally high—$137bn in 2024 and a 2025 run-rate pointing toward ca. $145bn—which supports risk pricing and issuance but demands disciplined underwriting of peril, trigger, and model risk. For allocators, the result is a clear, actionable proposition: harvest cash-plus spreads tied to event risk while adding a source of return with historically low correlation to traditional assets—provided governance and sizing are done right. 

Source: Artemis

What cat bonds are—and how they pay you

Catastrophe (“cat”) bonds transfer a slice of an insurer’s disaster risk to investors via a special-purpose vehicle (SPV). Investors post collateral (typically in a trust) and receive a floating coupon—benchmark cash yield (SOFR/Euribor) plus a risk spread. If a covered event occurs and the contractual trigger is met, investors forfeit part or all of principal; if no trigger occurs by maturity (usually 2–3 years), principal is returned and investors keep the coupons. Triggers come in four main forms: indemnity (linked to the sponsor’s actual losses), industry loss (e.g., PCS estimates), parametric (e.g., wind speed, quake magnitude), and modeled loss. Indemnity minimizes basis risk for the sponsor; parametric can resolve faster but increases basis risk.

Catastrophe bond structure

Source: Fed of Chicago

The market is now large and growing. In the twelve months to mid-2025, new cat bond issuance exceeded $21 billion, an all-time record; outstanding cat bonds reached roughly $55 billion by June 2025, up ~19% year over year. Multiple independent trackers called out a record first half of 2025 and a pace consistent with the first $20bn+ full year of issuance for the sector.

Property Catastrophe Bond Issuance 2010 to H1 2025 

Source: Aon Securities

Cat bonds sit within Insurance-Linked Securities (ILS), alongside collateralized reinsurance and sidecars. ILS capital across structures reached an estimated $121 billion by late-2025, reflecting insurer demand for alternative capacity and investor appetite for diversifiers.

Why allocators care: the investment case in three lines

First, true diversification: cat bond returns are driven by catastrophe risk, not equity multiples, credit spreads, or rate cycles. Under most conditions, correlations to traditional assets are low; mark-to-market drawdowns cluster around event seasons rather than macro shocks. Second, carry plus spread: coupons combine cash yields (now material) with risk premia linked to expected loss (EL) and demand/supply. 

Swiss Re Index Comparison

Source: SwissRe; Bloomberg

Third, pricing cycles: after heavy loss years, catastrophe reinsurance reprices (hard markets), pushing up expected returns for new issues—a dynamic that has supported robust performance through 2024–2025 in the absence of outsized loss events.

Swiss Re Global Cat Bond Index time to recovery for selected events

Source: GAM; SwissRe

The recent data line up with this view. Sector trackers reported strong cat bond performance into 2025, supported by higher collateral yields and wide spreads. Some investor letters and independent summaries cite double-digit trailing returns for broad cat bond indices through mid-2025. 

Where it fits (exact sizing depends on your liquidity budget and tolerance for event-cluster drawdowns.):

• A 2–5% sleeve inside Alternatives as a diversifier with limited macro beta.

• A return stabilizer that monetizes event premia and cash yield.

• A rebalancing source after event years, when spreads widen and forward returns improve.

Catastrophe bonds’ (“Cat Bonds”) historical annualized returns are in-line with high yield bonds and many alternatives, yet the asset class has experienced significantly less volatility:

Cat Bonds’ risk-return profile

Source: GAM; SwissRe; Bloomberg

What can go wrong—and how to underwrite it

Event severity and clustering. Peak perils (US hurricane, Japan typhoon, US earthquake) are episodic but not rare. Multiple events in a season can compound losses and drag NAVs for months as estimates firm up. Your underwriting should assume loss creep and delayed settlement when triggers require industry or modeled calculations.

Weighted Average Issuance Spread, Expected Loss and Multiple

Source: SwissRe

Model risk and climate drift. Vendor models (AIR/RMS) are approximations. Swiss Re and others have highlighted that losses have run high versus older priors; inflation, exposure growth, and climate change complicate hazard and vulnerability assumptions. This is not a reason to avoid the asset class; it is a reason to demand explicit model adjustment policies, climate overlays, and conservative parameter choices from managers.

Basis and trigger risk. Parametric and industry-loss structures can pay (or not) in ways that diverge from a sponsor’s actual losses. Read the attachment/exhaustion points and the trigger formula; insist on manager disclosure of expected basis risk at issuance and in secondary trades.

Liquidity and marking. Secondary liquidity is adequate in normal markets but can be thin around active hurricane periods or after large events. Expect NAV volatility and occasional discounts to modeled value. Stress test redemptions and ensure your vehicle’s liquidity (daily/weekly UCITS vs quarterly private) matches your own. Industry reports consistently note elevated insured losses across recent years, which can both tighten reinsurance supply (supporting spreads) and raise volatility. 

Operational and counterparty risks. Look through the SPV to the collateral agreement, eligible assets, and the calculation agent. Confirm cash management policy for collateral (e.g., money market funds vs Treasury repos), as collateral yield is now a meaningful contributor to return. 

Underwriting checklist (allocator-grade):

• Peril/region mix, sponsor concentration, attachment/exhaustion by deal and in aggregate.

• Expected loss and tail metrics (TVaR) at portfolio level; sensitivity to vendor model shifts.

• Trigger types by weight; explicit basis risk notes and historical experience with each trigger.

• Event process: how reserves are set, updated, and released; policy for loss creep.

• Collateral policy and eligible investments; cash yield capture mechanics.

• Reporting cadence around events; transparency on position-level marks and model changes.

Implementation: vehicles, sizing, and portfolio rules

Access routes.

• UCITS/’40-Act cat bond funds offer regulated access, daily/weekly dealing, and clean operational plumbing; they typically invest in listed cat bonds rather than private reinsurance. Example UCITS strategies and factsheets are publicly available and outline objectives, fees, liquidity, and risk disclosures.

• Private ILS funds expand the toolkit (e.g., collateralized re, ILWs, sidecars) but reduce liquidity.

• SMAs/co-invest allow custom peril mixes and fees but require operational lift and governance.

Sizing. Start modest (2–5% of an alts sleeve). Increase as your IC gains comfort with peril analytics, manager reporting, and the “post-event add” discipline. Avoid single-peril concentration; balance US wind with non-US perils and quake exposure.

Rebalancing discipline. Treat cat bonds like an option on post-event spreads. After large industry losses, new issuance tends to reprice wider; set pre-agreed add ranges (e.g., +X bps spread widening or expected loss bands) so you can allocate decisively when others de-risk. Industry trackers have documented multiple record issuance periods in 2024–2025, consistent with strong sponsor demand and investor participation; use issuance windows to refresh portfolios at attractive terms. 

Governance and fees. Scrutinize management/performance fees, pass-throughs, and trading costs relative to expected excess return. In UCITS, ensure the KIIDs and prospectus align with actual practice (e.g., use of derivatives, leverage caps). In private funds, focus on side-pocket mechanics and gate provisions.

Conclusion

Cat bonds offer clean, actuarially driven diversification that most multi-asset portfolios lack. 2024–2025 has seen record issuance, healthy performance, and stronger collateral yields—conditions that make implementation straightforward for allocators prepared to underwrite event risk with discipline. Start with a measured UCITS sleeve, insist on peril diversification and transparent modeling, and treat post-event spread widening as your re-up opportunity.