Catastrophe Bonds Surge—Diversify Your Portfolio with Alternative Investments

The catastrophe bond market is breaking records this year, attracting a broader mix of institutional and retail investors as climate risk, inflation, and reinsurance demand converge to reshape global capital flows.

According to an Artemis report issued Friday, issuance of catastrophe bonds—also known as cat bonds—has already reached $15.025 billion this year, surpassing the previous full-year record for the January-to-November period. With another month remaining in the first half of 2025, the market is on pace to eclipse its annual issuance record of $17.7 billion set just last year.

The month of May alone accounted for nearly $5.9 billion in new deals, making it the single largest issuance month in cat bond history. Artemis also reported that the overall market size has grown 15.5% since the end of 2024, reaching an outstanding value of more than $57.1 billion.

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The surge comes despite record levels of maturities in the first half of the year. Analysts at Artemis noted that issuance activity has not only outpaced roll-offs but has done so while drawing more first-time sponsors than any other half-year on record. Repeat issuers have also scaled up their deal sizes, further reinforcing cat bonds' role in the reinsurance stack.

While the market remains predominantly focused on U.S. perils—particularly hurricane risk—2025 could mark a turning point in diversification, depending on sponsor appetite and how the upcoming wind season unfolds.

Momentum is also being driven by product innovation and broader access, particularly for retail investors. In a May 14 interview with Bloomberg, Fermat Capital Management managing director John Seo called the market’s expansion an "inflection point," citing inflation as a core factor.

Properties wrecked by natural disasters are more expensive to rebuild in both the U.S. and Europe, Seo told Bloomberg. He estimates the market will grow by 20% this year, which would bring total size to around $60 billion by year-end.

Returns have supported the bullish outlook. Over the past year, cat bonds returned 14% on average, according to a Swiss Re index cited by Bloomberg—outperforming many traditional high-yield markets.

That relative resilience, even amid global economic volatility and political uncertainty—including trade tensions sparked by President Donald Trump's tariff policies—has positioned cat bonds as a compelling alternative investment.

The asset class is structured so investors take a loss only if a qualifying catastrophe occurs. In the absence of such events, the bonds often perform well during rising-rate environments, offering yields that remain competitive without traditional credit risk exposure.

As the market scales, so too does competition among fund managers. Bloomberg reported earlier this month that Zurich-based GAM Holding AG terminated a long-standing $3 billion cat-bond co-management deal with Fermat in favor of a new partnership with Swiss Re. 

The move prompted swift client reallocations, with Fermat gaining approximately $1.1 billion in new money while GAM's funds saw about $1.2 billion in redemptions between March and April.

Other major players are also expanding their reach. Twelve Securis—a newly merged entity formed by Twelve Capital and Securis—now manages $8.5 billion in insurance-linked securities, including $6 billion in cat bonds.

Swiss Re, for its part, has more than 190 proprietary peril models and a staff of 50 in-house scientists focused on catastrophe risk. Christopher Minter, head of Swiss Re Alternative Capital Partners, told Bloomberg the reinsurer intends to be "unequivocally one of the leaders of the ILS market in the short to medium term."

Meteorologists expect the 2025 Atlantic hurricane season to be more active than usual, according to Bloomberg, raising questions about whether cat bond returns can hold through the second half of the year. Yet even with heightened risk, firms are leaning into growth.

Still, Artemis projects that at least $1.1 billion more in cat bonds will settle before June 30, putting the first-half total above $16.1 billion. If the current pipeline holds, 2025 is likely to become the strongest year on record for catastrophe bonds—both in terms of issuance volume and market depth.

As extreme weather and inflation continue to redefine the global risk landscape, investors may find that catastrophe bonds offer something traditional markets increasingly cannot: uncorrelated returns in an era of convergence.

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