Institutional investors are increasingly turning to catastrophe bonds and other insurance-linked securities (ILS) as a reliable source of yield, diversification, and macroeconomic resilience, according to Mariagiovanna Guatteri, CEO of Swiss Re Insurance-Linked Investment Advisors Corporation (SRILIAC).
Interest in ILS has been growing steadily since the market’s inception in the 1990s, but macroeconomic conditions in recent years have accelerated institutional demand.As Guatteri, CEO of one of reinsurance firm Swiss Re’s specialist ILS asset manager units explained recently, the rise in interest rates in 2022 brought an unexpected dynamic to financial markets: both debt and equity valuations declined simultaneously.
This challenged the long-held assumption that a mix of debt and equity instruments would provide sufficient diversification, and led many portfolio allocators to reassess correlation risk and evaluate how their portfolios might perform under new market conditions.
“One asset class which appeared to tick a lot of boxes was catastrophe bonds,” said Guatteri.
“Cat bonds pay a relatively high return to investors in normal years. When a specified event occurs – an earthquake or hurricane, for example – the bond’s coupon payments and possibly even principal are reduced. But crucially, there’s nothing about a stock market crash which causes a hurricane, or another event which could trigger a cat bond. So we see that these instruments have very low correlation to financial markets, and are therefore an excellent source of diversification,” she continued.
The performance of the cat bond market has proven resilient across market cycles. The Swiss Re Cat Bond Index, which has tracked the sector since 2002, has delivered positive monthly returns 89.5% of the time, even through periods of extreme financial market stress.
Inflation, typically a challenge for fixed income assets, has had the opposite effect on the ILS space.
As Guatteri explained, “Inflation is a key concern for the property insurance industry: higher insured values at risk mean higher potential losses. But inflation can actually be a tailwind for the cat bond industry, since those expected higher losses are modelled and they increase insurers’ need for risk capital.”
Adding: “That increase in demand can increase ILS market spreads for new issuances, and therefore increase returns.
“Furthermore, inflationary periods will normally lead to higher interest rates but, as most cat bonds have a floating rate coupon structure typically linked to treasury money market funds, this will also increase the return on cat bonds.”
The growth of the market reflects these dynamics. Cat bond and related ILS issuance reached $7.1 billion in the first quarter of 2025, which pushed the total outstanding market to a new record high of $52.2 billion.
Institutional investors are integrating ILS across a range of portfolio categories. “Many investors place ILS allocations within their alternative fixed income portfolios due to the structural similarities between many ILS instruments and fixed income products,” Guatteri noted. “Cat bonds are traded in a secondary market, providing liquidity to investors.”
Others allocate ILS alongside hedge funds, attracted by their high-yield, short-duration, floating-rate characteristics.
Guatteri also noted that a third approach is to treat ILS as a standalone asset class, allowing institutions to build specialist expertise, manage dislocations effectively, and align ILS exposures with long-term strategic goals.
Regardless of how institutions access the market, Guatteri emphasized that “the asset class’s diversification benefits, resiliency to macroeconomic contexts, and potential for a favourable balance of risk and return can make ILS an important long-term addition to institutional portfolios.”
Of course, in recent weeks the global financial markets have become particularly volatile again, in the wake of US tariff announcements.
But, as we reported, the catastrophe bond market remained resilient and calm, while continuing to deliver relatively uncorrelated returns.
The recent period of volatility provides cat bond fund managers and other ILS investment specialists with another valuable data point, that demonstrates how insurance-linked securities (ILS) and reinsurance-linked investments are a welcome diversifier at times of stress when all other asset classes tend to correlate and go down.
