Cat bond market primed for growth as perils, sponsors and capacity expands: Man Group

A new article from Man Group has highlighted how the catastrophe bond market continues to offer effective pricing competition, multi-year cover against a range of perils, and an additional source of capacity. All of which leads the firm to call out that it believes the market is well placed for further growth, provided pricing remains attractive to investors and sponsors.

Authored by Andre Rzym, Partner and Portfolio Manager, Systematic, and Tarek Abou Zeid, Partner and Head of Client Portfolio Management, Systematic, the article explains that catastrophe bond returns have been positive every year since 2002, with double digit returns recorded in the last three years.

The primary exception to this pattern occurred in 2022, when the Swiss Re Index declined by 2.15%. Major hurricane Ian was the main contributor towards that decline, with its impact amplified by the storm’s landfall in a densely populated area, while losses over the year were compounded by secondary perils, including floods and hailstorms.

However, the authors importantly noted that this annual decline was an exception rather than the norm.

Providing further context, the authors explain that a well-diversified cat bond portfolio may only hold one or two deals exposed to smaller perils.

“In a portfolio of 100 equally weighted holdings, a triggering event may only result in a 1-2% loss. If the portfolio has a net expected annual return of 8%, such losses could be absorbed within a few months. Even for peak perils, to which more bonds are likely to be exposed, differences in geographical exposure, seniority, trigger type (such as an indemnity or industry index) and recovery basis (occurrence, aggregate) offer additional diversification,” the article reads.

In addition, the authors underline that catastrophe bonds offer true diversification given that their low correlation with traditional assets is tied to natural disasters rather than financial market conditions. And as a result, unlike traditional assets that often fail to provide protection during severe market crashes, catastrophe bonds remain independent and hold their value when equities suffer major losses.

Catastrophe bonds’ appeal to sponsors also goes beyond additional capacity. These financial instruments also support competitive pricing, limit counterparty exposure, and offer multi-year cover.

“While traditional reinsurance usually has a one-year term, cat bonds commonly have terms of around three years. Sponsors can therefore secure multi-year cover, and some deals permit early termination,” the authors explain.

Given the scale of benefits that the asset class provides for investors and sponsors, Man Group outlines that it believes the market appears well placed to grow without distorting the market price of risk.

“Since 2002, the market’s capitalisation has grown from around USD0.5 billion to USD63 billion. Despite a four-year pause following the GFC, the market has grown steadily at about 23% per year. 2025 was a record year for issuance, and 2026 appears to be heading in the same direction,” Man Group said.

“While growth has been impressive, cat bonds remain a much smaller market than many traditional financial assets, such as the US high-yield bond market which exceeds USD1 trillion. Provided cat bonds remain an attractive proposition, and as investor awareness and understanding develops, demand for these assets should continue to grow.”

Further capacity into the market is likely to be drawn by several drivers. Man Group observes that climate change is likely to increase the scale of insured losses across the globe, noting that if insurer capital remains constant, more risk will then need to be ceded to reinsurers, and on to cat bonds.

The firm also emphasised that the effects of inflation and urbanisation can increase insured losses, which will ultimately push up the amount of risk that needs to be ceded by insurers.

With the frequency and severity of secondary perils constantly rising, more sponsors are turning to the cat bond market to secure protection. Therefore, this expanded capacity is, in turn, driving heightened investor interest towards the market too.

Man Group also highlighted how the cat bond market has seen several transactions that cover cyber and terrorism risks.

“The first terrorism-linked cat bond was launched in 2003. Golden Goal Finance provided cover in the event that the 2006 FIFA World Cup was cancelled, with terrorism among the risks contemplated. In 2019, Pool Re introduced pure UK terrorism cover to the market. GAREAT followed with French terrorism cover in 2024, and TRIP with US terrorism cover in 2026,” the authors said.

“The first cyber cat bond deals, launched in 2023, were private, but these were closely followed by public deals later that year, and specialised cloud outage deals appeared in 2024.”

Adding: “In our view, cyber could eventually become a third “peak peril”. Although we expect it to remain smaller than hurricanes and earthquakes, it could provide a valuable source of capacity (for sponsors) and diversification (for investors). We don’t expect terrorism cat bonds to reach the same scale but, given there are around 14 terrorism pools globally, we expect further growth.”

The authors also observed that the cat bond space market constantly sees repeat sponsors, but underlined that new sponsors continue to enter the market, given their attraction to the competitive pricing and additional capacity that it offers.

“The cat bond market has scope for further growth, and maintaining current premiums. Investors should be selective on deals and supportive of new perils as they arise,” Man Group said.

Turning to the complexities of cat bond valuation and risk assessment, the authors state from time to time, certain perils or cat bonds that use parametric triggers are claimed to be underpriced, meaning that the spread offered is considered too low for the risk.

“We are generally cautious about such claims. Cat bonds, by their nature, are designed to trigger infrequently, so a long and relevant history is needed to draw firm conclusions about event frequency. Moreover, an investor arguing that a new issue is underpriced must explain why its assessment of the risk differs from the price accepted in the market,” Man Group explained.

Adding: “Investors who avoid risks they consider underpriced may benefit over the long term, but avoiding a single loss does not, by itself, demonstrate skill. Consider Hurricane Melissa in 2025, which triggered an International Bank for Reconstruction and Development (IBRD) bond providing parametric cover to Jamaica. If an investor avoided that bond because they considered its spread too low, should avoiding the resulting loss count as alpha? At a higher spread, the same investor might have bought the bond and incurred the loss. The point is that the principal reduction on a single deal is independent of the spread that was paid. It is the expectation of the two that matters, and that requires much more data.”

Another important feature that the author’s distinguish, is how the cat bond market is broadly ‘buy and hold’ in nature, with trading volumes typically higher in the primary market in comparison to the secondary market.

As well as this, many catastrophe bond issuances are eligible for reporting and tracking through FINRA’s Trade Reporting and Compliance Engine (TRACE), making their transaction prices available for analysis.

The author’s note that data shows that secondary-market volumes remain fairly steady throughout the year. By contrast, primary issuance, however, is seasonal and generally tends to slow down during the Atlantic hurricane season. For fund managers anticipating substantial inflows, this seasonal pattern may affect how quickly they can invest capital in new issuances.

To conclude, the authors emphasise the dual value proposition driving the asset class forward.

“For investors, the cat bond market has historically delivered equity-like returns with bond-like volatility over more than two decades. Because returns are primarily driven by physical events rather than market sentiment, and because premiums tend to harden after large losses, drawdowns have been both shallower and shorter than those of equities or bonds. For sponsors, the market offers pricing competition, multi-year cover, and an additional source of capacity.”

“As the range of perils, sponsors and geographies expands, we believe the market appears well placed for further growth – provided pricing remains attractive to both investors and sponsors.”