Understanding Insurance-Linked Securities and How the Brookmont Catastrophic Bond ETF (NYSE: ILS) Looks to Help Investors Enhance Diversified Portfolios
Catastrophe bonds are a rapidly growing asset class that many people might still be relatively unaware of. They allow capital market investors to participate in the economics of natural disaster insurance and earn income (ideally at a premium to other, more traditional fixed income opportunities) in exchange for providing risk capital against defined catastrophic events. With a 25-year performance history marked by an annual loss rate of only ~1.39% (compared to an expected annual loss rate of 2.22%), and correlation coefficients below 0.2 to both equities and traditional fixed income¹, we believe these bonds have demonstrated the unique ability to deliver low correlation, high income and diversification to portfolios.
In April 2025, the Brookmont Catastrophic Bond ETF (NYSE: ILS) became the first U.S.-listed catastrophe bond ETF, making this historically institutionally-accessed asset class available to a broader spectrum of investors. This paper will explain the mechanics of catastrophe bonds, examine their historical performance characteristics, and outline a framework for potentially incorporating the ILS ETF into a diversified portfolio.
What Is a Catastrophe Bond?
Catastrophe bonds emerged in the mid-1990s following Hurricane Andrew's 1992 landfall in Florida. At the time, Andrew was the costliest natural disaster in U.S. history and the storm’s aftermath exposed a critical shortfall in traditional reinsurance capacity. Both insurers and reinsurers needed a new way to distribute catastrophic risk, and they looked to the capital markets to provide an answer.
At their core, catastrophe bonds are floating-rate debt instruments issued by a Special Purpose Vehicle (SPV) on behalf of a sponsor (typically an insurer, reinsurer, corporation, or sovereign government) that seeks to transfer a defined layer of catastrophic risk to investors. The sponsor pays a regular premium to the SPV, and investors receive that premium income plus a floating rate of interest on their principal.² If a defined trigger event occurs during the bond's term, all or part of the investor's principal is transferred to the sponsor. Conversely, if no qualifying event occurs, principal is returned to investors at maturity.
There are three key structural features that distinguish catastrophe bonds from conventional debt.
The Cat Bond Market’s Scale, Growth, and Breadth
Since the first catastrophe bonds were issued in the late 1990s, the market has grown steadily. In 1997, there were four cat bond deals totaling $795.5M in new issuance (and subsequently bringing the total addressable market to $785.5M). Since then, annual issuance has continued to expand, driven by rising insured values in catastrophe-prone regions, increasing reinsurance pricing, as well as a steady investor appetite and growing demand for the uncorrelated return streams they can provide. Final 2025 totals boasted 122 new deals totaling over $25.6B during that calendar year alone, bringing the outstanding cat bond market AUM to over $61.3B.4
Cat bonds now cover perils spanning the globe: U.S. hurricanes, California earthquakes, European windstorms, Japanese typhoons, and increasingly, emerging market risks in Mexico, Chile, Turkey, and beyond. The World Bank has become a significant issuer on behalf of sovereign nations, using cat bonds to fund rapid disaster response. We believe this development demonstrates the versatility of the structure across geography, peril type, and sponsor profile.
Low Correlation, High Independence
The fundamental investment thesis for investors looking to hold catastrophe bonds rests on their independence from financial market cycles. Because cat bond performance is driven by randomly-occurring natural disaster events rather than economic conditions, credit cycles, or monetary policy, they exhibit historically low correlation to traditional asset classes.
Based on 23 years of Swiss Re Cat Bond Index data, the correlation coefficient between cat bonds and equities or fixed income has remained below 0.2.5
This independence has held during the most significant market crises of the past two decades. During the 2008 financial crisis, cat bonds returned +2.5% while the S&P 500 fell 37% and hedge funds dropped 19%. During the March 2020 pandemic shock that sent global equities down 22.8%, cat bonds returned -0.70%. The structural reason is straightforward: hurricanes, earthquakes, and wildfires do not respond to Federal Reserve policy, trade war rhetoric, or banking sector stress.6
Superior Risk-Adjusted Returns
Cat bonds have not merely avoided losses during market crises, they delivered compelling absolute and risk-adjusted returns across the cycle. The Swiss Re Global Cat Bond Index posted a 20-year Sharpe ratio of 1.01, compared to 0.602 for the US Corporate High-Yield Index and just 0.103 for the BB Global Aggregate Bond Index. Over five-year period from February 2020 through the first quarter of 2025, $100 invested in the Swiss Re Cat Bond Index grew to approximately $145 (an approximate 45% return) versus an almost $120 for high-yield corporate bonds and $80 for the Bloomberg US Treasury Index over the same period.7
Even in one of the asset class' most challenging recent periods, Hurricane Ian's 2022 Florida landfall, which generated approximately $65 billion in insured losses, the structural resilience of diversified cat bond portfolios was on display. Full-year cat bond losses in 2022 were limited to approximately 2% according to the Swiss Re Index. The market rebounded decisively, delivering 19.7% total returns in 2023.8
Exceptional Capital Preservation
Perhaps the most counterintuitive data point about catastrophe bonds is their loss history. Despite covering the world's most devastating natural disasters, the asset class has incurred annual losses of approximately 1.39% while still anticipating losses of around 2.22% and outperforming expected annual profits by almost 83bps. This compares favorably to high-yield corporate bond annual default rates of 4-6%.9
Portfolio Construction: Where Does the ILS ETF Fit?
The historical performance data suggests a straightforward portfolio construction thesis: adding catastrophe bond exposure to a traditional equity/bond portfolio maintained return while meaningfully reducing volatility and improving the Sharpe ratio.
This is supported by quantitative analysis based on the Swiss Re Cat Bond Index alongside the S&P 500 and Bloomberg US Aggregate Bond Index. A standard 60/40 portfolio produced a 8.56% annualized return with 10.69% standard deviation and a Sharpe ratio of 0.59. Adding a 10% cat bond allocation, reduced both equity and fixed income proportionally to 54/36/10, maintained returns at 8.48% while reduced volatility to 9.68% and improved the Sharpe ratio to 0.65. A more aggressive 20% allocation (48/32/20) further improved the Sharpe ratio to 0.70.10 In this hypothetical example, replacing fixed income allocation with cat bonds, rather than reducing proportionally from both sides, generally produced even more meaningful returns while maintaining risk levels.
Finally, with the risk of losses for catastrophe bond investors being tied to randomly occurring natural disaster events, an allocation to cat bonds will potentially have the benefit of diversifying the portfolio’s risk away from the far more common economic- and market-tied risks that most stocks and bonds are susceptible to.
Practical Allocation Considerations
The ILS ETF is best understood as occupying a unique space in a portfolio, distinct from both traditional fixed income and conventional alternative investments. Its floating-rate structure provides natural inflation protection absent from traditional bonds. Its event-driven risk profile is uncorrelated not just to equities, but to credit spreads, duration, and the economic cycle. And its collateralized structure means investors are not taking on leverage, counterparty credit risk, or illiquidity premium that characterize many alternative asset vehicles.
For advisors and allocators, the ILS ETF could occupy space in three distinct portfolio roles:
ILS has a 1.58% expense ratio and provides investors access to cat bonds with the widely-known benefits of the ETF wrapper, like intraday liquidity and full holdings transparency, resolving the historical barriers to institutional access that kept this asset class out of reach for most investor portfolios. ILS also brings inventors the benefit of professional portfolio management to this nuanced space.
Structural Tailwinds for the Asset Class
Several converging dynamics make the present moment particularly compelling for ILS allocation. The global protection gap (the difference between economic losses and insured losses from natural disasters) continues to widen as urbanization increases in catastrophe-prone regions, property values inflate in high-risk areas, and traditional insurance and reinsurance capacity faces increasing constraints. This supply-demand imbalance has driven attractive pricing for cat bond investors and continues to create demand for alternative risk transfer capital.
Rising interest rates have benefited cat bonds through their floating-rate structures. Unlike fixed-rate bonds, cat bond coupons typically float with rates, reducing duration risk and sensitivity to rising yields. The cash-collateralized structure is designed to insulate investors from credit risk and duration exposure that can plague traditional fixed income during periods of weakness in the bond market.
Global insured losses from natural disasters have grown at a 5-7% annual rate in recent decades, with 2025 marking the sixth consecutive year global insured losses climbed above $100 billion. Weather disasters accounted for 92% of all natural disaster losses in 2025, and broad scientific consensus is that such events are becoming more severe and more frequent.12 In the United States alone, the average number of billion-dollar weather disasters per year has surged from approximately three annually in the 1980s to twenty annually over the past decade.11 For cat bond investors, the increasing frequency and intensity of climate-driven disasters represents a potential structural demand driver. As the gap between what nature destroys and what traditional insurance covers continues to widen, the capital markets role in absorbing catastrophe risk becomes not just useful, but essential.
Finally, the globalization of the cat bond market as it expands beyond its traditional U.S. hurricane and California earthquake origins to include European windstorms, Japanese typhoons, and emerging market perils, continues to broaden the diversification opportunity set. New issuers, new perils, and new geographies entering the market create additional spread and may reduce concentration in any single risk.
Catastrophe bonds represent a mature, structurally distinct, and historically compelling asset class that has delivered genuine diversification across more than two decades of market cycles, financial crises, and natural disasters.
The Brookmont Catastrophic Bond ETF eliminates the structural barriers (high minimums, illiquidity, and investment complexity) that historically confined this asset class to large, institutional allocators. ILS looks to provide investors better access to an asset class with the rare combination of high potential income, diversification, and capital preservation from a risk source that is generally structurally independent of the financial market cycle.
Glossary of Key Terms
Swiss Re Global Cat Bond Index—A rules-based benchmark published by Swiss Re that tracks the total return performance of the global catastrophe bond market. It captures coupon income and principal gains or losses across a broad universe of outstanding cat bonds, and serves as the primary industry standard for measuring the asset class’s historical performance. The index is unmanaged, does not reflect fees or expenses, and is not available for direct investment.
Sharpe Ratio—A measure of risk-adjusted return calculated by subtracting the risk-free rate (typically the return on short-term U.S. Treasury bills) from an investment’s return, then dividing the result by the investment’s standard deviation of returns (a measure of volatility). A higher Sharpe ratio indicates that an investment has delivered more return per unit of risk taken. For example, a Sharpe ratio of 1.01 means the investment earned approximately one unit of excess return for every one unit of volatility.
US Corporate High-Yield Index—A broad market index, published by Bloomberg, that tracks the total return performance of U.S. dollar-denominated, below-investment-grade corporate bonds (commonly referred to as “junk bonds”). It is widely used as a benchmark for high-yield fixed income strategies and serves as a comparison point for assessing the risk-adjusted performance of other income-generating asset classes.
BB Global Aggregate Bond Index—A Bloomberg index that measures the total return performance of a diversified, global basket of investment-grade and sub-investment-grade fixed income securities, including government bonds, corporate bonds, and securitized debt across multiple currencies. It is commonly used as a broad reference point for global fixed income performance.
Bloomberg US Treasury Index—A Bloomberg index that tracks the total return performance of U.S. dollar-denominated, fixed-rate U.S. Treasury securities with at least one year remaining to maturity. It is a standard benchmark for U.S. government bond performance and is widely used to represent the “safe haven” or low-risk tier of the fixed income market.
bps (Basis Points)—A standard unit of measurement used in fixed income and finance to express small differences in interest rates, yields, spreads, or other percentage-based figures. One basis point equals one one-hundredth of a percentage point (0.01%). For example, 83 basis points (83 bps) equals 0.83%.
Sources
¹Swiss Re Cat Bond Index, 1997-2023. Fitch Group.
² Wharton, Moody’s
3 Artemis (percent of total market calculated as of 2/24/2025)
4Artemis
5A correlation coefficient measures the degree to which two investments move together, using a scale from 1 to -1. A reading of 1 means the two investments move exactly together. A reading of 0 indicates they move completely independently. A move of -1 means the two move in exactly opposite directions.
6Brookmont, Aon
7Brookmont, Bloomberg
8Aon
9Brookmont, Bloomberg
10King Ridge Capital, data analyzed from 12/15/2015 through 2/27/2026. The Sharpe ratio measures the return of an investment relative to the amount of risk taken to achieve it by calculating returns over the risk-free rate compared to the underlying volatility.
11Munich Re
12Climate Central