What are Cat bonds? Advantages, disadvantages and risks
Updated:
23 JUN, 2025
In recent years, investment in catastrophe bonds (CAT Bonds) has gained increasing attention as an effective strategy to diversify investors' portfolios. In this article, we explain what they are, what are the advantages, disadvantages, and risks of investing in them, and which funds invest in catastrophe bonds.
What are catastrophe bonds?
Catastrophe bonds, known as CAT Bonds, are a type of fixed-income financial instrument issued by insurance companies that allows them to transfer to investors the risk of a certain natural catastrophe (called a triggering event, for example, a hurricane, an earthquake, a pandemic…).
In return, investors receive a periodic coupon, whose value is indexed to inflation, as long as the causing event does not occur before the bond's maturity, which usually ranges between one and five years.
However, if the triggering event occurs before the bond's maturity, the insurer can retain the bond's capital to pay its policyholders.
Advantages, disadvantages, and risks of catastrophe bonds
This type of bond is only affected by the risk of the insured event, that is, it is not subject to the conventional risks of the capital market. Catastrophic events are, by definition, of low probability, which adds a level of attractiveness to these instruments. In addition, coupons are usually high and, being periodic payments, they constitute a considerable source of liquidity for investors.
However, as we have said, catastrophe bonds carry the inherent risk of incurring total losses if a catastrophic event occurs during the life of the bond. This risk can be significantly mitigated through diversification, buying bonds through specialized funds that spread the risk among several CAT Bonds and other financial instruments.
On the other hand, insurance companies adjust their premiums annually based on previous and expected inflation, which can affect the attractiveness and profitability of these bonds for investors.
| Advantages | Disadvantages and risks |
|---|---|
| They are not exposed to the conventional risks of the capital market, allowing for decoupling | If the triggering event occurs, the investor may lose part or all of their investment |
| The coupon is usually high | The coupon is adjusted annually for inflation |
| The payment is periodic, providing liquidity |
What is the origin of catastrophe bonds?
On August 24, 1992, Hurricane Andrew, one of the most destructive in United States history, hit Florida and caused damages worth 26 billion dollars. This led to the bankruptcy of no less than eight insurance companies.
As a result, insurers began to look for ways to always ensure the necessary funds to cover future catastrophes. This is how the sector, in collaboration with capital markets and investment banking, created catastrophe bonds.
The first of these was issued by the United Service Automobile Association in 1997.
Examples of catastrophe bonds
To illustrate what events these bonds cover, let's look at a few examples:
- Pandemic bond: in 2003 the Swiss Reinsurance Company issued the first pandemic bond in history. The activation of the payments was conditioned on the combined annual mortality rate of the United States, United Kingdom, France, Switzerland, and Italy. The World Bank also used pandemic bonds through an issue called IBRD CAR 111-112, issued in July 2017 to support a mechanism created by the World Bank, the Pandemic Emergency Financing Facility.
- Meteorite bond: in 2014, the United Service Automobile Association issued the first meteorite bond that covered possible meteorite falls in the United States over the next four years.
- Earthquake bond: In 2018, the World Bank issued a catastrophe bond of 1.450 billion dollars to cover the risk of earthquakes in Japan. The triggering event was an earthquake of magnitude 7.5 or higher in certain regions of the country.
- Hurricane bond: In 2017 Mexico issued a catastrophe bond of 360 million dollars to cover the risk of hurricanes in the Pacific and the Gulf of Mexico. The bond would be activated if a hurricane caused damage above a predetermined threshold.
- Volcanic eruption bond: In 2019 New Zealand issued a catastrophe bond of 3.650 billion dollars to cover the risk of volcanic eruptions. The bond would be activated in the event of an eruption of magnitude 6 or higher in certain areas of the country.
Funds that invest in catastrophe bonds
Four of the funds marketed in Spain and specialized in catastrophe bonds are the Schroder GAIA Cat Bond, the GAM Star Cat Bond, the AXA IM WAVe Cat Bonds and the Franklin K2 Cat Bond. Below, we show you more detail about these four strategies.
Schroder GAIA Cat Bond
This fund focuses on the management of the risk of natural disasters, such as hurricanes and earthquakes, that could affect regions of Western Europe, Japan and the United States, where the subscription of insurance policies is common. To ensure prudent risk management, the fund diversifies its investments based on the type of hazard, the geographical area and the season of the year.
| Schroder GAIA Cat Bond | Fund data |
|---|---|
| ISIN | LU2399869788 |
| Manager | Schroders |
| Currency | EUR |
| Category | RF Others |
| Manager | Guillaume Courtet (from 30/09/2024) |
| YTD Return | 1.13% |
| 3-year return (annualized) | 6.95% |
GAM Star Cat Bond
Managed in collaboration with Swiss Re, the fund's objective is to generate long-term positive returns through a diversified portfolio of bonds issued by global insurers and reinsurers. The team uses proprietary risk simulation tools and advanced actuarial models to identify opportunities with an attractive risk profile, avoiding diversification for mere convenience.
| GAM Star Cat Bond | Fund Data |
|---|---|
| ISIN | IE00B6TLWG59 |
| Manager | GAM Investments |
| Currency | EUR |
| Category | RF Others |
| Managers | Mariagiovanna Guatteri and Weilong Su (from 07/05/2025) |
| YTD Return | 0.59% |
| 3-year return (annualized) | 7.67% |
AXA IM WAVe Cat Bonds
This fund focuses on an active selection of cat bonds issued by global insurers and reinsurers, evaluating the risk profile of covered natural events, the credit quality of the issuer, and the structural conditions of each instrument. AXA IM employs rigorous quantitative and climate analysis, complemented with proprietary actuarial models, to identify issues with a favorable risk-return relationship.
| AXA IM WAVe Cat Bonds | Fund Data |
|---|---|
| ISIN | IE00BZCPNC06 |
| Manager | Axa Investment Managers |
| Currency | EUR |
| Category | RF Others |
| Managers | François Divet (since 20/01/2017) and Ting Feng Xiang (26/01/2022) |
| YTD Return | 1,42% |
| 3-year return (annualized) | 7,64% |
Franklin K2 Cat Bond
This UCITS fund aims to generate attractive long-term risk-adjusted returns, with limited correlation with other asset classes, through a diversified portfolio of bonds linked to natural catastrophe risks. The fund's investment strategy is based on a systematic and proprietary process that applies a set of rules to select and weight catastrophe bonds. The fund primarily invests in catastrophe bonds issued by governments, governmental entities, supranational organizations, and corporate insurance-linked securities.
| Franklin K2 Cat Bond | Fund Data |
|---|---|
| ISIN | LU2303827195 |
| Manager | Franklin Templeton International |
| Currency | EUR |
| Category | RF Others |
| Managers | Vaneet Chadha (since 03/06/2024), Rob Christian (13/05/2024) and Lillian Knight (03/06/2024). |
| YTD Return | 1,64% |
| 3-year return (annualized) | 7,14% |
