How evolving relative valuations and diversifiers are redefining cat bond portfolios: Icosa Investments

With the first half of 2026 another remarkable period for catastrophe bond issuance, but the market remaining heavily concentrated on North American peak risks, a recent report by Icosa Investments AG has highlighted how diversifiers and normalised valuations between industry-loss-linked and indemnity structures is opening up additional relative-value opportunities.

The analysis, authored by CEO Florian Steiger, highlights a shifting landscape where historical valuation gaps between differing perils and structures are narrowing.

Specifically, the report shows how the relationship between industry-loss-linked and indemnity bonds has normalised, while secondary perils and diversifying risks are increasingly offering more competitive premiums than in previous market phases.

In the report, Steiger observes that beyond pure market size, the relative-value picture within the cat bond market has also evolved further in 2026.

“Particularly striking is the improved relative valuation of so-called diversifiers. For many years, risks outside the classic peak perils, in particular outside US hurricane and US earthquake, were often traded at lower premiums. This valuation gap has since narrowed. Secondary perils and diversifying risks today offer, in many cases, more competitive premiums than in earlier market phases,” Steiger explains.

The CEO went on to note that for investors, this narrowing gap opens up additional opportunities for portfolio differentiation, while also highlighting that selectively used diversifiers can help reduce concentration in US hurricane risks and, in individual segments, provide higher spreads relative to modelled risk than has historically been the case.

However, Steiger cautions that these premiums should be assessed in the context of higher model uncertainty, limited data history, as well as potentially greater sensitivity to local exposure and vulnerability assumptions.

Such diversifiers include European windstorms, North American wildfires, severe convective storms, Japanese risks and other regional natural perils.

“This development should not, however, be confused with a blanket preference for diversifiers. Higher premiums often also reflect real uncertainties, for example regarding model assumptions, claims inflation, exposure growth or local vulnerability,” Steiger added.

He continued: “At the same time, the valuation relationship between industry-loss-linked and indemnity cat bonds has normalised. In recent years there have been phases in which industry-loss-linked transactions traded at significant valuation discounts or premiums versus indemnity structures.

“These differences were driven in part by technical factors, differing investor demand, liquidity preferences and the specific role of industry-loss structures in the retrocession market.”

Conversely, Steiger affirms that within the current environment, these differences appear to be less pronounced, whilst also emphasising that for investors, this means that the choice between industry-loss-linked and indemnity transactions should again rely more strongly on single-name analysis.

It’s also important to note that industry-loss-linked catastrophe bonds typically offer higher standardisation, better comparability and lower dependence on the loss reports of an individual sponsor.

In return, investors end up bearing basis risk relative to the actual portfolio loss of the sponsor.

“Indemnity transactions reflect the sponsor’s risk more accurately and are often more efficient for the sponsor, but require particularly careful analysis by investors of underwriting quality, claims handling, contract terms and potential late notifications,” Steiger added.

Concluding: “The normalisation of relative valuations increases the importance of fundamental single-name analysis, as trigger type, sponsor quality, model assumptions, liquidity and spread compensation must again be assessed in a more differentiated way.”