Introduction

Insurance-Linked Securities (ILS) with exposure to natural catastrophe risk generated strong returns in 2025 with the Swiss Re Global Cat Bond TR Index returning +11.4%, compared to +7.3% for bonds broadly (Bloomberg US Aggregate Bond Index) and +8.5% for high yield bonds (ICE BoA US High Yield Index).

While the positive trends in pricing and terms are expected to continue during the January 2026 renewals, market supply and demand are more balanced, suggesting downward pressure on pricing, particularly for Cat bonds, given continued investor demand growth and record issuance.

We continue to expect ILS to provide solid risk-adjusted net returns that are unrelated to public markets, a profile we find particularly attractive given the less certain outlook for risk assets, and recommend maintaining broad ILS market exposure, while rebalancing back to strategic targets in anticipation of a reversion to high-single-digit / low-double-digit from the more recent high-teens hard market returns.

2025 Review

Aon, an insurance and reinsurance broker, estimates 2025 global economic losses from natural catastrophes of ~$260B with insured losses estimated to be approximately $127B, about 14% below the 2020-2024 inflation-adjusted average. Swiss Re Institute estimates $220B in global economic losses and $107B of insured losses including $89B of US insured losses largely due to the LA wildfires ($40B).

Hurricane losses were low, despite an active season, with 13 named storms (relative to expectations of 17) and 4 major hurricanes (in line with expectations). Melissa, the costliest hurricane of 2025 ($2.5B) made landfall in Jamaica while also affecting Haiti and Cuba.

As a result, ILS generated strong returns in 2025 with the Swiss Re Global Cat Bond TR Index returning +11.4%, compared to +7.3% for bonds broadly (Bloomberg US Aggregate Bond Index) and +8.5% for high yield bonds (ICE BoA US High Yield Index).

2026 Outlook

While the positive trends in pricing and terms are expected to remain in place during the January 2026 (1/1) renewals, when ~ 60% of global re/insurance transactions are finalized, there is more than sufficient capital to meet the moderate increase in re/insurance demand suggesting downward pressure on the overall rate of line (ROL), i.e., the ratio of premium paid relative to the loss recoverable. Guy Carpenter, a risk and re/insurance specialist, estimates a -12% decline for its US Property Catastrophe Rate On Line Index at the 1/1 renewals.

• In response to strong returns since 2023, reinsurers have expanded balance sheet capacity with Aon estimating overall re/insurance capital increasing $45B YoY to $760B as of 9/30/2025.
• Cat bond spreads are expected to compress as new and existing sponsors increase issuance in response to growing investor demand, attracted by the combination of strong returns and better liquidity. Cat bond issuance exceeded $20B in 2025, with outstanding issuance above $60B, as 15 new sponsors entered the market.
• Quota shares, Collateralized RE and Industry Loss Warranty, directly negotiated and less liquid with typically 1-year terms, are expected to be less impacted.
• More favorable terms and conditions, e.g., higher retention levels, are expected to be maintained. Higher retention levels reduce exposure to small scale losses typically associated with secondary perils.

While the anticipated decline brings the ROL below recent levels, pricing is expected to be adequate to cover underlying loss and re/insurance cost of capital and consistent with high-single-digit / low-double-digit returns.

The 2026 Atlantic hurricane season (June 1^st – November 30^th) is expected to be near normal. The National Oceanic and Atmospheric Administration (NOAA) and Tropical Storm Risk (TSR) forecasts 14 named storms, 7 hurricanes and 3 major hurricanes, below the 10-year and in line with the 30-year averages.

Conclusion

We continue to expect Insurance Linked Securities (ILS) with exposure to natural catastrophe risks to provide solid risk-adjusted net returns that are unrelated to public markets, a profile we find particularly attractive given the less certain outlook for risk assets. We recommend maintaining broad ILS market exposure, given expected spread pressure in CAT bond market, while rebalancing back to strategic targets as market supply/demand appears more balanced, suggesting a reversion to high-single-digit / low-double-digit returns from the more recent high-teens hard market returns.

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