An emerging trend within the catastrophe bond market reveals a growing disparity in the risk-adjusted returns, specifically between instruments tied to industry loss indices and those with other trigger mechanisms. Data compiled by Man Group, a prominent alternative and active investment management firm, indicates that industry-index linked cat bonds have, on average, experienced a faster decline in their return per-unit of risk. This has led to a noticeable divergence in spreads at the point of issuance when compared to other types of catastrophe bonds, particularly those with indemnity triggers. This pattern underscores an evolving landscape in how these specialized financial instruments are valued and perceived by investors, influenced by factors such as demand, transparency, and the perceived reliability of various trigger types.
Historically, the multiples-at-market, or the pricing efficiency at issuance for catastrophe bonds with industry-loss index triggers, have tended to be lower than their counterparts, such as indemnity trigger cat bonds. This phenomenon has been observed for several years and became more pronounced following 2020. Man Group's analysis, based on exponentially weighted moving averages of cat bond returns per-unit of risk since May 2006, illustrates this widening gap. The firm's systematic and quantitative trading unit, Man AHL, led by partner and portfolio manager Andre Rzym, meticulously tracked the rolling mean at-issue spread multiples across all cat bond deals, specifically isolating industry-index bonds from the broader market. This approach involved removing outlier transactions to maintain data clarity and accuracy.
The collected data vividly demonstrates that industry-index cat bond deals have been priced with increasing tightness over the past five years, a pattern also reflected in the secondary market. Rzym emphasized that focusing on at-issue data helps mitigate potential distortions caused by impaired cat bonds or those with exceptionally low expected losses that could skew the observed multiples. The chart presented by Man Group depicts the ratio of cat bond spread at issuance to expected loss, serving as a critical indicator of risk-adjusted return. While some minor fluctuations were noted between 2010 and 2020, indicating similar risk-reward profiles across different trigger types, a significant and persistent divergence commenced around 2020. This period marked a clear trend of industry-index deals launching at progressively tighter risk-reward levels compared to other trigger types.
Rzym further elaborated on the potential drivers behind this divergence, suggesting that while some market participants might inherently prefer industry-index deals due to perceived benefits like reduced idiosyncratic dependence on sponsor claims processes, the widening gap is more likely a reflection of fundamental supply and demand dynamics. Certain investment mandates may restrict funds to holding only industry-index deals, thereby creating a dedicated demand pool. Additionally, given that industry loss deals constitute approximately 20% of the market as of July 2025, larger funds may find it challenging to entirely avoid them, regardless of their intrinsic preferences. This continued demand, even at tighter pricing, contributes to the sustained lower spreads for this category of bonds. The data also reveals that this gap widened significantly during 2024, a period when insurance risk spreads for catastrophe bond issues peaked, and has remained relatively stable despite a moderation in prices observed in 2025.
The market's fluctuating preference for industry-loss cat bonds has been a recurring theme among ILS fund managers and investors. When these instruments are priced tightly, often comparable to indemnity cat bonds, some managers opt for an underweight position, citing the potential for correlation due to similar index triggers. Conversely, other ILS fund managers find industry-index cat bonds more appealing, valuing their transparency for modeling purposes. The availability of data and established models to approximate industry loss impacts, coupled with the elimination of uncertainties tied to sponsor claims processes—a common feature of indemnity trigger structures—makes them attractive to this segment of investors. Moreover, certain cat bond strategies are specifically designed to focus on index-trigger arrangements, leading to dedicated capital being deployed to support sponsors utilizing such structures. This specialized capital can further drive competitive pricing at issuance, depending on prevailing market conditions. Ultimately, Man Group's comprehensive data set offers invaluable insights into this distinct and evolving trend, highlighting the clear divergence in risk-adjusted returns between different catastrophe bond trigger types since 2020.
