Over the past several years deploying capital in the insurance capital markets, I’ve found that most coverage rarely goes beyond surface-level headlines, outcomes, and broad narratives. 

This newsletter takes a different approach - a perspective from inside the market - the pricing cycles, the capital flows, what’s moving markets, and what’s behind the headlines.

I leave every LP meeting with the same offer - send over any insurance related questions and I’d be happy to dig in. It’s a way for me to stay sharp on the various strategies outside my day-to-day. This week a CIO at a large RIA asked:

“How should I think about catastrophe bonds versus specialty insurance — are they the same trade? Side by side, the two fact sheets read almost identically: insurance-linked, uncorrelated, double-digit returns, portfolio diversifier.”

Great question. Nailed it. Proud dad moment. More of the same please.

Quick answer: It ain’t the same trade. It ain’t even close. “Insurance-linked” is one of the loosest terms in this market. What really matters? The source of the return.

Read on for the long answer…

Before comparing two insurance strategies, it helps to ask how outside capital earns a return from insurance at all. Broadly, there are three ways.

You can bear underwriting risk — take on the risk that claims run higher than the premium charged, and earn a margin for carrying it.

You can earn the spread on the float — invest the premiums in the years before claims come due, and keep the return they earn.

You can collect a fee — originate and service the risk for another balance sheet, and take a commission without holding it.

The life and annuity model from Issue 2 and Issue 3 runs mostly on the second engine. Managing general agents (more in a future issue) run mostly on the third.

This Issue is about the first engine, and the two machines built on it — insurance-linked securities and specialty insurance. Both earn their return primarily by bearing underwriting risk. That shared foundation is why they generally fall into a “diversifier” asset class for most allocators. 

Insurance-linked securities are a way to pledge your capital against a defined peril for a fixed term. The clearest example is a catastrophe bond. A reinsurer wants protection against, say, a major Florida hurricane; it issues a bond, an investor buys it, and the cash sits in a collateral account in Treasury money-market funds. If the hurricane described in the contract doesn’t happen, the investor gets the money back with interest and a spread on top. If it does, the principal goes to pay the claim. The risk is written down at the outset — which peril, which region, how bad it must get before money is lost. You are, in effect, a very well-collateralised reinsurer for one clearly specified thing.

Specialty insurance is a way to back an underwriting business. Specialty insurers underwrite the complicated, hard-to-model lines — marine, aviation, energy, political risk, terrorism, cyber, professional and financial liability — and Lloyd’s of London is the largest market for them. Capital sits behind a franchise that underwrites these risks continuously: selecting, pricing, declining the ones it doesn’t like, one renewal at a time. The return comes from underwriting profit, the investment income earned on the float, and a return on the capital being pledged. No single contract defines the exposure — there is a book of business, a team writing it, and a year that closes after a defined period.

Put the two side by side and the difference is not on the factsheet. It is in the machine.

With ILS, the skill is front-loaded. It goes into the work done before the money is committed — modelling the peril, judging whether the spread compensates for the risk of loss, choosing which bonds and layers to hold, watching the gap between what a trigger pays and what the insurer actually loses. Once the bond is held, little remains to be done. It pays, or it doesn’t. You are harvesting a risk premium that was priced the day you bought in.

With specialty, the skill never stops. The franchise underwrites every day — deciding what to write and what to decline, when to grow and when to sit still, how to reserve for claims that won’t be known for years. You are not harvesting a premium; you are backing a team’s judgement, exercised continuously, and the return is manufactured year after year.

The two are not only different to run; they are different to own. A catastrophe bond is a security — finite-term, collateralised, and tradeable — so the capital behind it can come and go. A franchise is an operating business, and its capital is a committed balance sheet, put to work for the long haul. Two kinds of structure; two kinds of money.

The two kinds of money behave very differently once a cycle turns. A cycle in insurance, as Issue 4 argued, is at its core a capital story: price is set by the supply of capital willing to carry the risk — when capital is abundant, price falls; when it retreats, price rises. One mechanism, driving both machines. What differs is how fast the money can move.

ILS prices the cycle in plain sight. The capital behind a catastrophe bond is mobile — it can move in and out, at scale and quickly, and it competes directly on price. So the spread on a cat bond is the cycle made visible: wide when that capital is scarce, compressed when it floods in. Watch the spread — and how large a multiple it is of the bond’s expected loss — and you are watching the cycle in real time.

The Swiss Re index that tracks the total return of the catastrophe bond market returned 19.7% in 2023, 17.3% in 2024, and 11.4% in 2025.¹ Read that sequence with care: the headline return blends the yield on the collateral, the risk spread, and the losses the year brought, so a run of strong years reflects benign catastrophe experience as much as wide spreads.

Still, the ILS investor sees the price clearly and can move responsively to it — moving up to more remote layers, rotating between perils, leaning toward privately negotiated deals, or waiting in cash for the next dislocation. It’s discipline, but it’s a discipline of selection: you choose what you own and what you pay for it. You don’t choose how the risk is underwritten.

Specialty experiences the same cycle, but you can't see it the same way. The capital behind a specialty franchise is committed to an operating balance sheet; it can't flood in and out the way ILS capital can, and there is no spread quoted in real time to signal where in the cycle you are. A hard market can carry an undisciplined book for years before the number turns. Because a franchise is a business and not a security, it can do something an ILS portfolio can’t: use skill to underwrite its way through the cycle. A good underwriting business can pull back from the lines that have gone soft, lean into the ones still holding, re-cut its terms, and grow into a dislocation as weaker competitors retreat. The ILS investor, however well they select, is choosing among risks already priced and shaped by someone else.

There is a string attached, though. Growing into a dislocation works only if the capital behind the desk holds through the loss that created the opening — and a franchise’s capital, unlike a cat bond’s indifferent collateral, is a relationship. Capital that arrives for the hard market and leaves after the first bad year forces the franchise to shrink at exactly the wrong moment, turning its one real advantage into its constraint. The question, then, is not only whether a franchise can underwrite through a cycle — it is whether the capital behind it will stay long enough to let it.

So are ILS and specialty insurance the same? No, they are fundamentally different trades. One is a risk premium you harvest; the other is a business you back. They behave differently through the cycle, they fail in different ways, and they require you to ask different questions before you commit.

For the ILS investor: Does the price of the cat bond represent honestly modelled perils, and is the spread enough to justify an allocation?

For the specialty franchise: Is this team disciplined, or just standing in a favorable pricing environment?

Each model requires a very different analytical lens.

The label is not the machine. “Insurance-linked securities” and “specialty insurance” are categories; “uncorrelated” and “diversifying” are descriptions. Neither names the risk that actually generates the return — a premium harvested, or a franchise backed.

Neither machine is necessarily better.  “Better” in this situation is subjective and depends on the investor, the price, and the manager. The point is narrower: the two are not interchangeable, and treating them as interchangeable, because the fact sheets invite it, is how an allocator ends up holding something other than what they meant to buy.

The diligence does not transfer. What tells you an ILS position is sound — questions about models, perils, spreads and triggers — is not what tells you a specialty franchise is sound — questions about people, discipline, reserves and judgement through a cycle. Knowing which machine you hold is what tells you which questions to ask.

The standing invitation holds. If you’ve been sitting on a question — about a product, a structure, an idea — send it over.

Until then.

Charlie Evans, CAIA
Chief Investment Officer, Zephyros Investments

¹Swiss Re Global Cat Bond Performance Index — total return of the catastrophe bond market by year (19.7% in 2023, 17.3% in 2024, 11.4% in 2025). https://www.artemis.bm/news/swiss-re-global-cat-bond-performance-index-returns-11-40-for-2025/