Catastrophe Bonds – Unique and Income. How to Invest in Them? [Guide]

Can you make money on catastrophes? Well, sort of. There are catastrophe bonds, which until recently were a niche product for institutional investors, but for a few weeks now have been theoretically available to individual investors. They are an extremely interesting, because for some reasons unique, asset.

In this article you will learn:

• What are catastrophe bonds?
• Why might catastrophe bonds be attractive to investors?
• Why are such securities a unique asset?
• How much will the cat bonds market grow in 2024?
• What unusual thing happened in April 2025 regarding this market?
• How can individual investors invest in cat bonds?

Catastrophe Bonds – What Are They?

It wasn't April Fool's Day. The world's first catastrophe bond fund debuted on the New York Stock Exchange on Tuesday, April 1, 2025. So for several weeks now, investors around the world who have the opportunity to buy ETFs listed on the NYSE, can gain exposure to this extremely interesting asset, the catastrophe bond.

What are catastrophe bonds? The dictionary definition is that a catastrophe bond is a financial instrument that transfers catastrophic insurance risk to investors who receive potentially high returns but can also lose their invested capital – completely or almost completely – in the event of a specific disaster.

In other words, these are debt securities issued by insurers and reinsurers (most often) or governments (less often) to reduce the risk associated with large-scale natural disasters – or more precisely, to cover the effects of potential disasters. These are usually 3-year securities offering double-digit interest per year, but buyers are burdened with the risk of large losses if the “black” scenarios materialize.

This is an asset that really only began to develop in the 90s, after Hurricane Andrew. The losses caused by this hurricane were so large that they proved difficult for insurers to cover. It was after this disaster that underwriters came to the conclusion that the risk had to be shared. Although the risk of a major natural disaster is usually around 1% (i.e. it occurs once every 100 years), from the 70s to the beginning of the XNUMXst century, the frequency of such events has grown quite significantly and remains at the level it "climbed".

Launch of the aforementioned fund Brookmont Catastrophic Bond ETF (ILS) is the first step towards making investing in this type of bond more widely available. Until now, they have generally been unavailable to retail investors.

Until now, cat bonds have only been available to institutional investors, and have been offered to them by investment firms such as pimco, Schroders, Amundi. Such securities are not usually listed on stock exchanges, due to their low liquidity – which is why they are usually traded on private markets. They are most often held in portfolios until maturity, which further reduces liquidity in this bond niche.

How the Catastrophe Bond Market Is Growing and Why They Are an Interesting Asset

Catastrophe bonds are – contrary to appearances – an extremely interesting investment asset, based on a rapidly growing market. According to Artemis.bm (a provider of analytical services and data), the global catastrophe bond market grew to USD 2024 billion in 52. New securities were issued at USD 17,7 billion, while in the whole of 2023, the issuance did not exceed USD 16 billion, which means an increase of 12%. The value of insurance covered by cat bonds in 2024 was USD 146 billion.

Why the boom in cat bonds? Catastrophe bonds allow insurers to transfer risk to capital markets, so companies are happy to issue them. Institutional investors, on the other hand, are looking for high rates of return but with limited risk. And as we know, major natural disasters are not an everyday occurrence.

Catastrophe bonds are currently yielding an average of about 10,5% per year (when denominated in USD), according to data from Swiss-based Plenum Investments, although they averaged a whopping 2023% ​​in 20 (their best year ever as an investment asset). The Swiss Re Global Cat Bond Index is up 17% in 2024, up from 20% the year before.

The interest rate on cat bonds is made up of a risk premium – or rather the insurance risk spread (derived from the premium paid for insurance coverage) – and an interest rate – the profit generated by collateral such as bank deposits (which has risen since 2022 along with interest rates). The overall profit is reduced by provisions for expected losses, which have been on the rise in recent years and currently stand at just over 2 percentage points, according to Plenum Investments.

What else is so attractive about cat bonds, apart from the double-digit interest rates? For example, the fact that this paper de facto it has no credit risk, no counterparty risk, and no general economic risk – so it is virtually uncorrelated with other bonds (Treasury or corporate) that primarily have such risks. Of course, in a “worst case” scenario, buyers will suffer losses, but if that doesn’t happen, cat bonds are generally interesting assets that contribute to increasing the risk-adjusted return of a portfolio.

What's more, catastrophe bonds are intrinsically negatively correlated with each other. As an asset, they provide more diversification than, for example, stocks. Why? It's simple. One bond has one risk, or the risk of one event occurring, because a hurricane in Florida doesn't affect an earthquake in California. In order to understand cat bonds as assets in more detail, it is worth delving into Artykuł Morningstar portal, or analysis experts from the investment company MAN.

If you’re interested in the technical details, catastrophe bonds are actually issued by a special purpose vehicle (SPV) that acts as an intermediary between the sponsor (usually an insurance or reinsurance company) and the investors. The sponsor pays premiums to the SPV, while investors invest their capital in the SPV, which then typically invests the money in safe, short-term securities (e.g., U.S. Treasury bonds). If a catastrophic event doesn’t occur during the life of the bond—usually one to three years—the investors receive their principal and interest back. However, if a catastrophe does occur, the sponsor can withdraw the funds from the SPV to cover insurance claims, and the investors can lose some or all of their invested capital.

An interesting fact is that in the first half of 2025, cat bonds worth about USD 10 billion will mature. This means that a significant amount of capital that is interested in such assets will return to the market. The middle months of 2025 should therefore be full of attractive issues and large transactions on this market.

How to invest in catastrophe bonds?

Okay, so what exactly is it? Brookmont Catastrophic Bond ETF? What is this investment vehicle? It is a publicly traded fund that holds only “cat bonds” tied to “randomly occurring” natural disasters such as hurricanes, fires, storms and earthquakes. According to the fund’s issuer, these bonds “provide a low-correlated, high-yield alternative to traditional bonds at a time when investors are looking for new sources of income and diversification.”

Brookmont Fund is actively managed. Issuer experts try to select the best bonds for the portfolio (which is to ultimately consist of about 75 out of about 250 securities available on the market), and if ILS faces increased outflows (redemptions), it has the ability to activate liquidity buffers. Interestingly, Brookmont points out that in the case of mass redemptions, it is possible to pay out assets "in physical form" - i.e. simply bonds (so there would be a payout in debt securities, i.e. conversion of participation units into cat bonds).

ILS has a total expense ratio (TER) of 1,58%. For now, Brookmont is marketing this product primarily to its smaller institutional investors, but high-net-worth individual investors should also consider it if their portfolios have a large bond component.

Brokers offering stocks and ETFs

There are a growing number of brokers offering access to the broad stock and ETF market.

For example on XTB Today, we can find over 4000 equity instruments and 1400 ETFs, a Saxo Bank over 19 companies and 000 ETF funds.

Broker
Country	Poland	Denmark	Cyprus
Number of exchanges on offer	16 exchanges	37 exchanges	20 exchanges
Number of shares in the offer	approx. 4000 - shares circa 2200 - CFDs on shares	19 - shares 8 - CFDs on shares	5 - shares
The amount of ETF on offer	approx. 1400 - ETF approx. 200 - CFD on ETF	3000 - ETF 675 - CFD on ETF	323 - ETF
Commission	0% commission up to EUR 100 turnover / month	according to the price list	according to the price list
Min. Deposit	0 PLN (recommended min. PLN 2000 or USD 500, EUR)	PLN 0 / EUR 0 / USD 0	100 USD
Tool	xStation	SaxoTrader Pro Saxo Trader Go	EToro platform
	REVIEW	REVIEW	REVIEW
	CREATE AN ACCOUNT	CREATE AN ACCOUNT	CREATE AN ACCOUNT

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. From 72% to 89% of retail investor accounts record monetary losses as a result of trading CFDs. Think about whether you understand how CFDs work and whether you can afford the high risk of losing your money.