2025 saw a long-standing pattern reverse within the catastrophe bond market, as diversifying risks began offering spreads comparable or higher than those of traditional peak perils, while valuations between index-linked and indemnity structures normalised, Florian Steiger, CEO of Icosa Investments AG highlighted in a recent report.Steiger explained in the report that this combination has “created a broad set of opportunities and enables a level of differentiation between funds that has rarely been possible in recent years.” “One of the most notable developments in the cat bond market in 2025 has been the shift in relative valuation between so-called peak perils and diversifying risks.Peak perils refer to the market’s core risks, most notably US hurricanes and US earthquakes, which historically account for the majority of insured loss potential and therefore command the highest risk premia.Diversifiers, by contrast, encompass all other perils, including European windstorms, Japanese typhoons and earthquakes, floods, wildfires, cyber risk, and other secondary perils,” Steiger explained.

For over a decade, diversifier catastrophe bonds have consistently offered lower spreads, in comparison to peak-peril transactions.However, 2025 marked a reversal of this trend, as diversifying risks began to offer spreads that are in some cases comparable to, or even higher than those of peak perils.“This new valuation dynamic creates compelling opportunities for portfolio optimization.

Diversifying risks no longer provide diversification benefits alone, but also offer competitive returns.This enables the construction of portfolios that are more balanced from both a risk and return perspective than has been possible in recent years,” Steiger further explained.According to Steiger, a number of factors have driven the higher diversifier spreads within the catastrophe bond market.

Firstly, a number of major catastrophe modelers have revised their models for previously underestimated risks in recent years.A key example is the update to the convective storm model by AIR/Verisk, which now assigns materially higher expected losses to hail and tornado risk in the United States.“These changes reflect experience from a series of severe convective storm seasons that generated insured losses at levels previously considered unlikely.

Higher expected losses ultimately translate into higher spreads for new issuances and renewals,” Steiger added.The CEO also highlighted how the Los Angeles wildfires in January 2025 fundamentally changed the perceptions of wildfire risk within the cat bond market.Cat bonds with wildfire exposure, whether as a standalone peril or as part of aggregate multi-peril structures, saw significant spread widening, while a number of aggregate transactions that had already eroded part of their retention following Hurricanes Milton and Helene in 2024 were further impacted by the wildfires, which ultimately led to market value adjustments and higher risk premia.

Steiger also identified the growing cyber catastrophe bond as a significant factor contributing to the increased diversifier spreads.“Given the inherent model uncertainty and the lack of long historical loss data, investors require substantial risk premia for cyber cat bonds.The increased issuance of such bonds in 2025 has pushed up average spreads within the diversifier segment,” the CEO said.

As previously mentioned, 2025 also saw a return to normalisation in the relationship between the two main trigger structures in the cat bond market: index-linked and indemnity.In comparison to 2024, which was characterised by pronounced valuation differentials between the two trigger types, Steiger explained that 2025 presented a largely balanced picture, with both triggers trading close to their long-term average valuations, with neither index-linked bonds demonstrating a meaningful premium, or trading at an unusual discount relative to indemnity structures.“This normalisation suggests a balanced equilibrium between the retrocession and reinsurance markets.

Neither market currently shows signs of overheating or capital scarcity that would lead to relative dislocations.For investors, this means that the choice between index-linked and indemnity structures should presently be driven primarily by portfolio construction considerations, such as desired transparency, settlement speed, or diversification, rather than by relative valuation differences,” Steiger explained.To conclude, Steiger affirms that both the increased relative attractiveness of diversifiers and the normalisation between trigger types, may prove to be persistent but are by not guaranteed.

Importantly, the CEO notes that a severe US hurricane season could push peak-peril spreads higher and re-establish the traditional valuation gap, while disruptions across the retrocession or reinsurance markets could also lead to divergences between index-linked and indemnity structures.“Nevertheless, the current environment offers attractive opportunities for active cat bond investors.The convergence in valuations allows for a stronger focus on fundamental risk analysis and portfolio construction, rather than primarily trading relative pricing differences.

Investors willing to engage with the additional complexity of diversifying risks and different trigger structures can benefit from a broader and more balanced opportunity set,” Steiger concludes..All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance can be accessed online.

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