Catastrophe (CAT) Bonds: Diversification when you need it

"With returns driven by hurricanes and earthquakes, cat bonds offer true diversification from other asset classes"

The catastrophe (cat) bond space is seeing unprecedented demand for capital. The abundance of quality issuance since Hurricane Ian in what can often be a restricted asset class is opening up an unexpected opportunity and therefore portfolio diversification potential.

In an environment of high inflation and volatile financial markets, investors are increasingly turning to innovative investment options to safeguard their returns and enhance portfolio diversification. One such solution is Catastrophe Bonds, commonly referred to as (cat) bonds or insurance-linked securities (ILS). At GAM Investments, we have partnered with global reinsurer Swiss Re, through its subsidiary Swiss Re Insurance-Linked Investment Advisors Corporation (SRILIAC), to co-manage our ILS Fund range and to provide investors access to Swiss Re's extensive natural catastrophe (Nat Cat) risk knowledge and underwriting expertise.

What are Cat Bonds?

Fundamentally diversified returns driven by natural events that have shown low correlation to other asset classes even in times of market stress."

Catastrophe bonds, also known as cat bonds, a type of insurance-linked security (ILS) are fixed income instruments issued by insurers and reinsurers to transfer to investors exposures from potentially large insured losses associated with natural catastrophes, as well as other ‘perils’ such as terrorism and cyber risk. These bonds provide a form of reinsurance so that the insurer’s liabilities are covered, and they can afford to settle in full and aid recovery. In return - investors in cat bonds get paid a fixed rate of interest – just like a regular bond. The skill is to calculate each cat bond’s true risk and identify the opportunities with the most attractive yields.

Why invest in cat bonds now?

Diverse return drivers
Uncorrelated with broader financial markets
Enhanced liquidity
Strong ESG credentials
Attractive entry levels relative to history

Key Characteristics

Adaptive to rising rates and inflation.

Cat bonds by their very nature and construct are adjustable-rate instruments that are indexed to inflation. The coupons on cat bonds are all floating rate; every basis point rise in interest rates on the short end of the curve flows directly into the coupon.

With regard to inflation, insurance companies themselves meticulously reset their premiums on an annual basis with every policyholder according to prior and expected inflation. This means that the very nature of the business itself is indexed to inflation.

Fear, uncertainty and doubt drives insurance and reinsurance buying.

Fear, uncertainty and doubt tends to affect the psychology of insurance buyers, compelling them to buy more insurance at a premium.

But crucially, investors in the cat bond market do not necessarily pay for the benefit with a higher risk because a market crash, or even an event like the war in Ukraine, cannot cause a hurricane or earthquake to occur.

Alignment with ESG principles.

Cat bonds are well aligned with environmental, social and governance principles.

E: They are at the forefront of monitoring changes in weather extremes and their impact on economies.

S: Insurance in general is a social form of finance, applied to neutralise risk across a broader pool to reduce its impact and severity on society.

G: The cat bond market brings an unprecedented level of market transparency around pay outs for catastrophes. This allows governments to plan and budget for their response to such catastrophes.

Cat Bonds during crisis years

In a world of specialist asset classes whose alternative status has been undermined by correlations with other risk assets, cat bonds offer diversification on a fundamental level. Because their pricing is not driven by economic or corporate events, returns from cat bonds are largely independent of mainstream markets and fundamentally non-correlated with traditional asset classes.

GAM's PARTNERSHIP WITH SRILIAC

GAM partners with Swiss Re subsidiary SRILIAC, a New York-based, SEC-registered investment advisor with USD 5 billion of AuM, to co-manage its ILS strategies. Swiss Re is one of the world's leading providers of insurance-based risk transfer and has been a pioneer in the ILS market since its inception in the late 1990s.

As part of Swiss Re, SRILIAC benefits from Swiss Re's broader Nat Cat related capabilities, including more than 50 dedicated scientists working in catastrophe risk research, over 190 proprietary peril models and approximately 200 terabytes of curated portfolio data.

The Portfolio Management leadership team, MariaGiovanna Guatteri and Weilong Su, have decades of industry experience managing Cat Bond portfolios through various market cycles and have significant expertise in Nat Cat modelling and underwriting.

MariaGiovanna Guatteri: Cat Bond "Pioneer"

After receiving her PhD in geophysics from Stanford, MariaGiovanna has built a career applying Nat Cat related science to the capital markets. With 20+ years of experience trading and managing portfolios of Cat Bonds, she has witnessed and remained a driving force in the market's rapid growth and maturation.

She now is responsible for offering the Cat Bond portfolio management capabilities that she, her team, and Swiss Re have developed over their long involvement in the market to investors.

MariaGiovanna Guatteri

CEO SRILIAC, Alternative Capital Partners

Weilong Su

Head Portfolio Management SRILIAC, Alternative Capital Partners

Dr. Rom Aviv joined GAM Investments in 2025 to lead its ILS business.

Dr Rom Aviv

Head of ILS

Thought Leadership Papers: Swiss Re

Why Invest in ILS

January 2025

ILS and Climate Change

September 2024

Ways to Access ILS

October 2023

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Disclaimer: Past performance is not an indicator of future performance and current or future trends. The indications could be based on figures denominated in a currency that may be different from the currency of your residence country and therefore the return may increase or decrease as a result of currency fluctuations. Capital at risk: all financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed. Any reference to a security is not a recommendation to buy or sell that security.

GAM is not a client of SRILIAC nor an investor in any SRILIAC investment vehicles. SRILIAC serves as a co-investment manager sub-adviser with discretionary investment powers for certain of GAM’s investment vehicles. GAM has not received any cash or any non-cash compensation in exchange for this endorsement. GAM compensates SRILIAC in connection with the services it provides to GAM investment vehicles. As a result of SRILIAC’s investment sub-advisory co-investment management relationship with GAM, GAM has an incentive to make positive statements about SRILIAC, its employees and its affiliates.