How will CAT bonds fare in 2026?
The 2026 outlook for CAT bonds. Analysis by Mariagiovanna Guatteri, CEO and CIO of SRILIAC (part of the SwissRE Group), delegated manager of the GAM Star CAT Bond Fund.
Following the strong performance of CAT bonds between 2023 and 2025, investors are undoubtedly wondering whether these securities continue to represent an attractive investment opportunity.
The short answer is yes. We believe the CAT bond market continues to offer an attractive risk/return profile. The high spreads observed in 2023-2024 primarily reflected the revaluation following Hurricane Ian and the resulting increase in risk premiums across the insurance market. This revaluation phase, which historically follows events that cause significant losses to the sector, typically translates into greater market discipline, improved structural conditions, and higher-quality risk selection.
Although spreads have since moderated, CAT bonds continue to exhibit highly attractive characteristics, including low volatility, short duration, and minimal counterparty exposure. In addition to their well-established low correlation with traditional asset classes, CAT bonds offer a combination of features that are increasingly rare in the current fixed income landscape. Empirically, CAT bond default rates match those observed in the less risky segment of the high-yield universe (default rates of approximately 80–100 basis points, equivalent to a BB+ rating). However, despite spread compression, the risk premium of CAT bonds remains significantly higher than the average for one- to three-year US high-yield bonds.
In conclusion, even after the strong rally of recent years, CAT bonds continue to offer attractive, uncorrelated yields, with an attractive risk-adjusted return profile compared to other segments of the fixed income universe.
What lessons have we learned in 2025 that can be applied in 2026?
2025 further confirmed a long-standing lesson in our asset class: we believe that patience and discipline are key ingredients for generating sustainable alpha.
Seasonal hurricane forecasts offer limited information; disciplined long-term modeling yields concrete results. 2025 has once again demonstrated that seasonal hurricane forecasts are of limited value as investment signals. First, the 2025 hurricane season exhibited below-average characteristics, in contrast to the high activity predicted by most seasonal forecasts. Despite continued advances in technology, data science, and artificial intelligence, short-term forecasts remain inherently volatile and unreliable as investment signals. Second, even if such forecasts were consistently accurate, and even if the number of storms was substantially lower than average, the correlation with insured losses could still be limited. For example, during the 1992 season, only four hurricanes were recorded, but the first of them, Hurricane Andrew, caused unprecedented insured losses in Florida. Maintaining a medium- to long-term perspective based on robust models and disciplined portfolio management continues to offer a much more consistent and evidence-based approach to generating returns.
Secondary risks require greater analytical rigor and caution. Greater caution is required when investing in bonds exposed to secondary risks, including wildfire risk, as demonstrated again in 2025. In the case of wildfires, even when events appear deterministic—particularly those caused by human activity where the responsible parties can be identified—the ultimate extent of losses often remains uncertain due to lengthy and unpredictable subrogation processes, in which insurers seek compensation from liable third parties. Unlike claims management and settlement mechanisms for more established perils, subrogation lacks a standardized regulatory framework and can extend over several years, making it difficult to accurately represent in stochastic models.
Secondary risks, such as floods and severe convective storms, also exhibit greater model variability and data sensitivity than peak risks, such as hurricanes in the United States, leading to greater model uncertainty and requiring a conservative approach. Unless exposure to secondary risks provides a sufficient additional risk premium, we deliberately focus on the latter category of risks, where model sophistication and empirical experience offer greater reliability.
What are the opportunities for the strategy and the asset class in 2026?
The CAT bond market is expected to continue to expand, with the arrival of new sponsors, risks, territories, and structures. This evolution will offer investors greater diversification, improved portfolio construction, and increased trading opportunities.
More generally, the ILS market is growing and innovating, expanding into emerging lines of business such as cyber insurance, accident, life and health, and parametric solutions, as well as new structures and investment vehicles within the property insurance sector. The development of these sub-segments and the overall expansion of the ILS market could offer managers and investors significant potential for scalable and profitable growth.
ILS managers who have the ability to access a broad range of risks in an evolving risk landscape are at an advantage as they can better capture potential opportunities for risk-adjusted returns and diversification.
This is a machine translation from Italian language of a post published on Start Magazine at the URL https://www.startmag.it/economia/cat-bond-previsioni-2026/ on Sat, 10 Jan 2026 07:00:20 +0000.