Why is the catastrophe bond market so hot right now?

In 2025, the cataclysmic bond market broke many records. And many are hoping for another great year, with investors flocking to the traditionally overlooked asset class.

Issuance of so-called CAT bonds will balloon to $25.6 billion in 2025, 45% higher than 2024’s record of just under $17.7 billion, according to specialist data provider Artemis.bm.

The issuance resulted from 122 deals, surpassing the previous record of 95 set in 2023, and confirmed 15 first-time sponsors entering the market. Taken together, these records reflect a year of breakthroughs for an industry long considered a relatively niche corner of the industry.

Andy Palmer, Head of Insurance Linked Securities (ILS) Structuring for EMEA and APAC swiss reinsurance companyThe company, one of the world’s largest reinsurance companies, said no one could have predicted the amount of CAT bond issuance in 2025, calling the feat “absolutely amazing.”

“No matter how you look at it, the market is growing. We’re seeing bigger deals happening, new sponsors coming into the market, (and) we’re seeing a lot more risk,” Palmer told CNBC on a video call.

“I think this was a mental shift for everyone looking at this space,” Palmer said. “We expect that to continue.”

First created in the 1990s, CAT bonds refer to a type of financial product designed to raise funds for insurance companies in the event of a natural disaster such as a hurricane or earthquake.

These insurance-related securities are essentially a means by which an insurance or reinsurance company transfers to investors the risk of potentially large losses due to extreme events. This provides insurance companies with access to funds to help pay out claims in the event of a catastrophe.

Swiss Re’s Palmer said around 60% of deals in the CAT bond market tend to be for three years, and investors are likely to want to renew coverage when these deals expire in 2026.

“So a very simple rule of thumb might be to go back to 2023 and look at the amount of new issuance, which we measure to be about $15.6 billion, and that would be kind of the floor,” Palmer said.

Palmer said CAT bond issuance could reach around $20 billion in 2026 as more growth and larger deals are expected. If realized, it would be the second largest issuance on record, although it would not be as much as 2025.

Absent a catastrophic event that causes a loss, CAT bonds are known to offer very attractive returns similar to stocks, low volatility, and low correlation with broader financial markets.

The emergence of this asset class as an increasingly mainstream financial product comes at a time when the climate crisis is increasing the frequency and intensity of extreme weather events.

In recent weeks alone, for example, widespread winter storms have left hundreds of thousands of people without power in the United States, severe flooding has wreaked havoc in large parts of Mozambique, Eswatini, South Africa and Zimbabwe, and a massive heat wave has hit 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 posting three consecutive years of double-digit returns for many CAT bond fund strategies in 2025.

“This, combined with the increasing use of cat bonds as an efficient multi-year reinsurance source among insurers and others seeking to transfer catastrophe risk, will ensure that 2026 is another strong year for issuance in this sector,” Evans said.

He continued: “Over the next year, there will be a significant level of maturity trading in the market, increasing cash levels that will need to be recycled into new issuance or returned to investors.”

“This should increase investor awareness of the benefits of cat bonds and ILS as a diversifying asset class and further ensure that executing trades remains attractive for buyers of cat bond protection, and as such, Artemis expects to see strong cat bond deal flow in the coming months.”

In fact, while only $683 million in CAT bond issuance has been tracked so far this year, more than $2 billion has already been issued and is expected to settle in the coming weeks, Evans said.

Bob Smith, president and co-chief investment officer of Austin-based investment firm Sage Advisory Services, said CAT bonds and insurance-related securities are outstanding choices for investors looking to diversify their portfolios in the coming months.

“As a dispersant? Oh my god, that’s all you’re looking for in the whole spreadsheet,” Smith told CNBC on a video call.

“This is the essence of MPT,” Smith said, referring to the acronym for Modern Portfolio Theory, an investment strategy designed to balance risk and return in assets.

“Modern portfolio theory says you need to diversify your portfolio. Well, this is typically the best way to accomplish that right now,” Smith said.

Not everyone was so bullish about the outlook for CAT bonds. Fitch Ratings analysts expect the alternative reinsurance capital market to continue growing in 2026 due to strong investor supply, but caution about increased capital pressure.

“Continued demand momentum, including the entry of new sponsors and the expansion of off-peak risks such as wildfire, cyber, and casualty risks, will also contribute,” Fitch Ratings analysts said in a research note published Jan. 15.

“Catastrophe bonds achieved double-digit returns in 2025 as losses from the California wildfires reached manageable limits and catastrophe bonds generally had a better position in ceding catastrophe reinsurance towers.”

Like Swiss Re’s Palmer, Fitch Ratings analysts said they expect CAT bond investors to reinvest their huge profits into the ILS market this year, resulting in capital growth and pressure on earnings.

“However, Fitch expects investor returns in 2026 to remain attractive relative to other asset classes,” they added.