Why the catastrophe bond market is so hot right now

The catastrophe bond market shattered many records in 2025, and many are expecting another successful year as investors flock to an often overlooked asset class.

Issuance of CAT bonds increased to 25.6 billion dollars In 2025, that figure eclipsed the 2024 record of just under $17.7 billion by 45%, according to specialist data provider Artemis.bm.

The issuance resulted from 122 transactions, surpassing the previous record of 95 set in 2023, and saw 15 sponsors enter the market for the first time. Taken together, these records reflect a breakout year in what has long been considered a relatively niche corner of the insurance industry.

Andy Palmer, head of insurance-linked securities (ILS) structuring for EMEA and APAC Swiss ReCAT, one of the world’s largest reinsurers, stated that no one could have predicted the amount of CAT bond issuance in 2025 and described this achievement as “absolutely remarkable”.

“Depending on the size you want to measure, the market is growing. We are seeing larger deals being made and new sponsors coming to the market. [and] “We’re seeing the risk increase meaningfully,” Palmer told CNBC via video call.

“I think it’s just a shift mentally for anyone looking at this field,” Palmer said. “We expect this to continue going forward.”

First created in the 1990s, CAT bonds refer to a type of financial instrument designed to raise money for insurers in the event of natural disasters such as hurricanes or earthquakes.

These insurance-linked securities are essentially a way for insurance companies or reinsurers to offload the risk of potentially large losses from extreme events to investors. This gives insurance companies access to financing, helping them pay claims in the event of a disaster.

About 60 percent of deals in the CAT bond market are three-year, and investors will likely want to renew coverage when those deals expire in 2026, Swiss Re’s Palmer said.

“So a very quick rule of thumb would be to take a look at new issuance in 2023, which we measure at about $15.6 billion, and that could provide some kind of backdrop,” Palmer said.

The prospect of further growth and larger deals in 2026 means CAT bond issuance could rise to around $20 billion, Palmer said. If realized, this would not be as large as 2025 but would still represent the second-largest issuance year on record.

In the absence of a catastrophic event that triggers the loss, CAT bonds are known to offer extremely attractive stock-like returns, low volatility and low correlation to broader financial markets.

The emergence of this asset class as an increasingly widespread financial instrument The climate crisis is causing both the frequency and intensity of extreme weather events to increase.

For example, in just the last few weeks, a spreading winter storm left hundreds of thousands of people without power in the United States. severe flood It caused damage in large parts of Mozambique, Eswatini, South Africa and Zimbabwe, and big heat wave It affected southeastern Australia.

Steve Evans, owner and editor-in-chief of Artemis.bm, told CNBC that investor interest in the asset class remains “very high” after many CAT bond fund strategies achieved double-digit returns for the third consecutive year in 2025.

“This, alongside the increased uptake of cat bonds as an effective multi-year source of reinsurance among insurers and others seeking catastrophic risk transfer, should see 2026 see another year of strong issuance in the sector,” Evans said. he said.

“Over the next year the market will also see significant maturing deals that will increase cash levels and need to be used in new issuance or returned to investors,” he continued.

“This, together with growing investor awareness of the benefits of cat bonds and ILS as a diversified asset class, should ensure that deal execution remains attractive to buyers of cat bond hedges, so at Artemis we expect cat bond deal flow to be buoyant in the coming months.”

In fact, only $683 million of CAT bond issuance has been pursued so far this year, Evans said, with more than $2 billion already on the way and to be settled in the coming weeks.

Bob Smith, president and chief investment officer of Sage Advisory Services, an Austin-based investment firm, described CAT bonds and insurance-linked securities as a standout choice for investors looking to diversify their portfolios in the coming months.

“As a diversifier? Oh my God, that’s the only thing you’re looking for in this entire spreadsheet,” Smith told CNBC via video call.

“That’s the essence of MPT,” Smith said, referring to the acronym for modern portfolio theory, an investment strategy designed to balance the risk and return of assets.

“Modern portfolio theory says you really need to diversify your portfolio. In fact, that’s the best you can do right now,” Smith said.

Not everyone was so optimistic about the outlook for CAT bonds. Analysts at Fitch Ratings said they expect growth in the alternative reinsurance capital market to continue in 2026, citing strong supply from investors, but warned of increased capital pressure.

“Continued momentum in demand, including the entry of new sponsors into the space and the rise of non-peak hazards including wildfire, cyber and casualty risks, will also contribute,” Fitch Ratings analysts wrote in a research note published Jan. 15. he said.

“Catastrophe bonds post double-digit returns with manageable losses in 2025 Wildfires in California and overall higher positioning of catastrophe bonds in established catastrophe reinsurance towers.”