$ILS: The Easiest Way to Invest in CAT Bonds?

Brookmont Catastrophic Bond ETF is perhaps the clearest example of the kinds of opportunities Riskvest is looking to highlight. Imagine being able to buy CAT bonds as easily as buying the S&P 500! Well, as of April 2025, you can do just that. The $ILS ticker on the New York Stock Exchange can be purchased through your broker on any regular brokerage account. The fund is managed by Brookmont Capital and King Ridge Capital Advisors.

But what does purchasing this ticker actually get you? In their Investment Case $ILS is touted at "A New Gateway to Catastrophe Bond Investing". According to this document, $ILS will focus only on natural catastrophe bonds, meaning that your portfolio's exposure to insurance risk will stem from Hurricanes, Earthquakes, Typhoons and other natural events around the world.

As a quick reminder, ETFs work by having investors pool funds into a centralized Asset Manager which does the buying and selling of large lots of securities, aiming to allocate the investments towards a risk profile set out in their prospectus. In this case, buying $ILS adds money to a pool from which King Ridge will use to purchase catastrophe bonds, giving you a proportional exposure to each of the bonds in their basket.

Reviewing the chart to date shows that for the first 6 months of existence the value $ILS has stayed steady within the range of $19.80 - $20.40 (about 3 %). This stability is expected, as bond ETFs generate return mainly through dividends generated from the bond coupons. $ILS has so far paid one quarterly dividend of $0.402 on June 26th 2025, equating to roughly an 8% annual yield. Brookmont's published Fact Sheet on the fund states a coupon of 8.55% as at July 1, 2025, so we're about in line.

When purchasing a CAT bond, your money sits in a trust account earning the risk free rate, which is currently about 3.5% based on 1-year Tbills. The Artemis ILS Index puts the average Spread for ILS transactions to be 7% in 2025. In ILS context, the spread is the amount of return you expect to receive above the Risk Free rate, or the premium that the CAT bond issuer is paying for you to take on the CAT risk.

As such, we can roughly estimate an expected return for CAT bonds to currently sit at 3.5% + 7% = 10.5%. So where does the difference come from? Thanks to regulators requiring reporting on ETFs, there is much more information available to retail investors on the underlying $ILS CAT Bonds than most other ILS related investments, so Riskvest can do a bit of digging ourselves.

At the time of writing, the $ILS fund has $12M of assets under management, a small amount when compared to many well known ETFs but not unexpected due to the novelty of the product. If we compare this to the $56.2B estimate of outstanding CAT Bond issues from Artemis, we can estimate at as of 2025 Q3 retail investors represent a whopping 0.02% (that's 2 basis points) of the ILS market. Clearly Riskvest has it's work cut out for it promoting this type of growth.

In fact - the actual amount currently invested in CAT bonds is roughly $10M, with ~20% of the fund sitting in cash & government bonds. This partially explains depressed returns due to cash drag. When you invest $1,000 into $ILS, currently $200 of it goes straight into T-bonds, meaning it's not actually exposed to the additional risk nor return from CAT bonds.

We can combine these points of data to get a rough estimate for what the return from the CAT Bond portion of the fund without the cash drag:

This 9.81% estimate is much closer to our previous benchmark of 10.5%, and being that $ILS is a small subset of all available CAT bonds this seems like a reasonable gap. It would seem that an investment in $ILS can indeed provide us the expected returns that we'd hope for investing in CAT bonds.

The reason CAT bonds provide these significant spreads above risk free is the possibility of default being baked into the product. If the "big one" earthquake were to hit California, the bonds with exposure there would almost surely default and you'd get back zero principle - this is in contrast to regular bonds, which may still return 10-30 cents on the dollar after default, or equities which could regain losses in the future.

As such diversification within your CAT Bond investments is also a good idea. Luckily, the ETF format has that by default. Currently, when you buy into $ILS, you're buying into 36 CAT bonds at once, each with a face value of $250,000. Meaning, that if an individual bond completely defaults, the fund itself would lose $250,000 of principal out of it's $12M - or 2% - and NOT 100%, which would be the case if it only contained one bond.

Presumably as the fund grows, the number of bonds it's invested in will grow, and this diversification benefit will increase. One important caveat: The CAT bond market is relatively small and illiquid, so at a certain point of growth the fund will either need to invest in riskier bonds, concentrate more in existing investments, or introduce more cash drag.

ETF holdings are public information, and reporting allows even more transparency. $ILS published a semi annual report on June 30th, 2025 which lists the current coupon rates of held Bonds. At that point about $7M of the $8.8M fund was invested into bonds, so while we don't have details on all the bonds it currently holds, we have a significant subset and will be able to update with subsequent reports.

For the uninitiated, each CAT bond is issued by an intermediary "Special Purpose Insurer". Most of these entities will have a name ending in Re, short for reinsurance. The Sponser of the bond will be the insurer who is actually purchasing the coverage. For example, Four Lakes Re is an entity sponsored by American Family Mutual Insurance Co. When you buy the Four Lakes Re CAT bond, you're offering CAT cover to losses experienced by American Family.

Below you'll find a table of all bonds held by $ILS as of September 2025 along with some additional research. Each bond as a link to Artemis, the leading aggregator of all ILS related news, which provides an excellent inside view of many of the transactions. For those bonds included in the July 1st report, we have the coupon rate reported at that time.

Where available, we've included press releases, news articles and similar content on these bonds - interestingly, while some of them are proudly displayed on the Sponsor's website, many are difficult to find any information about at all. This is an interesting conundrum: I can buy $ILS right from my brokerage, but finding any information about a large chunk of what I'm buying is near impossible.

It's interesting to note the variety in sponsors. Classically (if there is such thing in ILS), we expect sponsors to be insurance companies. But what you'll also see here are also (quasi-)governmental entities, such as FEMA, Florida Citizens Insurance, and even large corporations like Kaiser Permanente. This shows some of the exciting innovations CAT bonds have had in recent years: they can be a clever way for non-insurance companies to manage their risk outside of traditional insurance markets

To estimate how often we can expect principal losses and the impact of diversification, we can use a simple model with simplified assumptions:

With this model, the likelihood that a given number of bonds in our basket default can be calculated using the binomial distribution. Below you'll find a simulator that allows you to adjust the number of bonds in your portfolio, the default rate, and the face value of each bond. By running the simulations, you can see the unique pattern of CAT Bond principal losses that occurs when bonds default.

Riskvest's mission is to spotlight opportunities for retail investors to add insurance risk to their portfolios. Today, ILS products remain the primary entry point for outside investors - and with $ILS lowering the minimum buy-in to just $20, it has become the most accessible way to gain this exposure.

Looking ahead, the opportunity set can broaden even further. We may see expansion into new risk types such as casualty, cyber, or life. As the market matures, greater liquidity could help address concerns like cash drag, while improved transparency into the underlying securities will be critical for wider adoption. Riskvest is excited to watch $ILS - and other innovators in this space - continue to evolve, opening the door for more investors to participate in this asset class.