The catastrophe bond market shattered a host of records in 2025 — and many expect another banner year as investors flock to what has been an often-overlooked asset class.

The issuance of so-called CAT bonds ballooned to $25.6 billion in 2025, according to specialist data provider Artemis.bm, eclipsing the 2024 record of just under $17.7 billion by a whopping 45%.

The issuance stemmed from 122 transactions, surpassing the previous record of 95 set in 2023, with 15 first-time sponsors seen entering the market. Taken together, these records reflect a breakout year for what has long been considered a relatively niche corner of the insurance industry.

Andy Palmer, head of insurance-linked securities (ILS) structuring for EMEA and APAC at Swiss Re, one of the world's largest reinsurers, said no one could have predicted the amount of CAT bond issuance in 2025, describing the feat as "absolutely remarkable."

"By any dimension you want to measure it, the market is growing. We are seeing larger deals being done, we are seeing new sponsors coming to market [and] we are seeing a meaningful expansion of risk," Palmer told CNBC by video call.

"It was just a shift, I think, mentally for everybody that looks at this space," Palmer said. "We expect that now to continue from here on in."

First created in the 1990s, CAT bonds refer to a type of financial instrument designed to raise money for insurers in the event of a natural disaster, such as a hurricane or earthquake.

These insurance-linked securities are essentially a way for insurers or reinsurers to offload the risk of potentially large losses from extreme events to investors. This in turn, provides insurers with access to funding, helping them to pay claims in the event of a catastrophe.

Swiss Re's Palmer said roughly 60% of CAT bond market deals tend to be for a three-year term and investors were highly likely to want to renew coverage when those deals expire in 2026.

"So, a very quick rule of thumb might be to have a look at the new issuance back in 2023, which we measure at about $15.6 billion, and that would provide a sort of floor," Palmer said.

An expectation of further growth and larger deals in 2026 means CAT bond issuance could climb to around $20 billion, Palmer said. If realized, this wouldn't be quite as much as 2025, but it would still represent the second-largest year of issuance on record.

In the absence of a disastrous event triggering a loss, CAT bonds are known to offer highly attractive equity-like returns, low volatility and low correlation to broader financial markets.

The emergence of this asset class as an increasingly mainstream financial instrument comes at a time when the climate crisis is leading to an increase in both the frequency and intensity of extreme weather events.

In just the last few weeks, for example, a sprawling winter storm has left hundreds of thousands without power in the U.S., severe flooding has wrought havoc across large parts of Mozambique, Eswatini, South Africa and Zimbabwe, and a major heatwave has gripped southeast Australia.

Steve Evans, owner and editor-in-chief at Artemis.bm, told CNBC that investor interest in the asset class remains "very high" after what was the third consecutive year of double-digit returns for many CAT bond fund strategies in 2025.

"This, alongside the increasing uptake of cat bonds as an efficient multi-year source of reinsurance among insurance carriers and others seeking catastrophe risk transfer, should ensure 2026 sees another strong year of issuance in the sector," Evans said.

"Over the coming year the market will also see significant levels of maturing deals that will drive cash levels higher and need to be recycled into the new issuance, or be returned to investors," he continued.

"This, along with rising investor awareness of the benefits of cat bonds and ILS as a diversifying asset class, should further ensure that deal execution remains attractive for buyers of cat bond protection, so at Artemis we expect cat bond deal flow to be brisk over the coming months."

Indeed, while only $683 million of CAT bond issuance has been tracked so far this year, Evans said there is already more than $2 billion in the pipeline and due to be settled in the coming weeks.

Bob Smith, president and co-chief investment officer at Sage Advisory Services, an Austin-based investment firm, described CAT bonds and insurance-linked securities as a standout choice for investors looking to diversify their portfolios over the coming months.

"As a diversifier? Oh my goodness, this is the one thing on that whole spreadsheet that you are looking for," Smith told CNBC by video call.

"This is the essence of MPT," Smith said, referring to the acronym for modern portfolio theory, an investment strategy designed to balance the risk and return of assets.

"Modern portfolio theory says you really need to diversify your portfolio. Well, this is quintessentially the best thing out there at the moment that you could achieve that," Smith said.

Not everyone was as bullish on the outlook for CAT bonds. Analysts at Fitch Ratings said they expect continued growth in the alternative reinsurance capital market in 2026, citing robust supply from investors, but warned of rising capital pressure.

"Continued momentum in demand will also contribute, including from new sponsors entering the space and the expansion of non-peak perils, including wildfire, cyber and casualty risks," analysts at Fitch Ratings said in a research note published Jan. 15.

"Catastrophe bonds achieved double-digit returns in 2025, with manageable losses from the California wildfires and the generally higher positioning of catastrophe bonds in cedent catastrophe reinsurance towers."

Like Swiss Re's Palmer, analysts at Fitch Ratings said they anticipate CAT bond investors to reinvest their bumper returns back into the ILS market this year, which in turn will boost capital and pressure returns.

"However, Fitch expects investor returns in 2026 to remain attractive relative to other asset classes," they added.