Catastrophe Bonds: Outlook 2026

December 2025 | MariaGiovanna Guatteri | Weilong Su | Dr Rom Aviv

Following the strong performance of catastrophe (cat) bonds between 2023 and 2025, investors are no doubt asking whether they remain an attractive investment opportunity.

The short answer is yes. We believe the cat bond market continues to offer an attractive risk–return proposition. The elevated spreads observed in 2023–2024 primarily reflected the repricing that followed Hurricane Ian and the subsequent increase in risk premia across the insurance market. This repricing phase, which historically follows large industry loss events, typically results in improved market discipline, enhanced structural terms, and higher-quality risk selection.

While spreads have since moderated, cat bonds continue to exhibit characteristics that remain highly attractive — including low volatility, short duration and minimal counterparty exposure. Beyond their well-established low correlation to traditional asset classes, cat bonds offer a combination of attributes that are increasingly rare in today’s fixed income landscape. Empirically, default rates of cat bonds correspond to those observed in the least risky segment of the high-yield universe (default rates of circa 80–100 bps; equivalent to a BB+ rating). However, despite spread compression, the cat bond risk premium remains significantly higher than that of average US 1–3-year high-yield bonds.

In conclusion, even after the strong rally of recent years, cat bonds continue to deliver compelling, uncorrelated income with an attractive risk-adjusted return profile relative to other segments of the fixed income universe.

What lessons did we learn in 2025 and can they be applied in 2026?

2025 was another data point reaffirming a lesson long understood in our asset class: we believe that patience and discipline are key ingredients in generating sustainable alpha.

2025 once again demonstrated that seasonal hurricane forecasts have limited value as investment signals. First, the 2025 hurricane season exhibited below average characteristics – in contrast to the elevated 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 were substantially below average – the correlation with insured losses may still be limited. For example, during the 1992 season, only four hurricanes were recorded, yet the first of them, Hurricane Andrew, caused unprecedented insured losses in Florida. Maintaining a medium- to long-term perspective grounded in robust modelling and disciplined portfolio management continues to offer a far more consistent and evidence-based approach to generating returns.

Enhanced caution is warranted when investing in bonds exposed to secondary perils, including wildfire risk, as evidenced again in 2025. In the case of wildfires, even when events appear deterministic – particularly those driven by human activity where liable entities can be identified – ultimate loss outcomes often remain uncertain due to lengthy and unpredictable subrogation processes, in which insurers seek recovery from responsible third parties. Unlike claim management and loss adjustment mechanisms for more established perils, subrogation lacks a standardised framework and can extend over multiple years, making it difficult to capture accurately within stochastic models.

Secondary perils such as flood and severe convective storm similarly exhibit higher model variability and data sensitivity than peak perils such as US hurricane, leading to greater model uncertainty and necessitating a conservative approach. Unless sufficient additional risk premium is provided by the secondary peril exposure, we deliberately concentrate on the latter category of risks, where model sophistication and empirical experience provide greater reliability.

What are the opportunities for the strategy and the asset class in 2026?

The cat bond market is expected to continue expanding, with new sponsors, perils, territories and structures entering the space. This evolution will provide investors with enhanced diversification, improved portfolio construction and increased trading opportunities.

More broadly, the ILS market is both growing and innovating, extending into emerging lines of business such as cyber insurance, casualty, life and health, and parametric solutions, as well as new investible structures and vehicles within the property catastrophe universe. The development of these sub-segments and the overall expansion of ILS could offer managers and investors significant potential for scalable and profitable growth.

From a fund management point of view, 2026 will remain a year of disciplined, meticulous management and active trading for our cat bond strategy.

Alternative reinsurance capital 2002 to Q2 2025

On the business development side, we remain committed to continuously developing new product ideas and identifying opportunities within the ILS domain to further expand our platform and aim to deliver profitable investment solutions for our clients. ILS managers such as ourselves, who have the ability to access a broad range of perils in a changing risk landscape, are at an advantage as they can better capture potential opportunities for enhanced risk-adjusted returns and diversification.

GAM partners with Swiss Re to co-manage its ILS strategies.