Cat bond risk spreads may decrease 10% in 2027, but market healthy and growing: Plenum

Speaking during a recent webinar, executives at Plenum Investments AG outlined that while catastrophe bond risk spreads have tightened around 15% and are expected to decrease around 10% in 2027, cat bonds remain a healthy and very diversifying and attractive asset class.

Plenum Investments recently hosted a webinar, where key executives from the firm analysed the current state of the catastrophe bond market and provided an overview of this year’s Atlantic hurricane season.

During the webinar, Henrik Hopmann, Junior Portfolio Manager at the firm, shared how Plenum expects the cat bond market’s momentum to continue as we begin to move towards year-end.

“We still see a continuously expanding market, a very healthy growing market. There’s still a lot of demand for cat bonds in the market, and we expect the market to grow and surpass the $70 billion mark at the end of this quarter,” Hopmann explained.

“Noteworthy is the high number of new sponsors that come to market and have been coming to the market year-to-date. We expect even more to come in this quarter with the issuances that are ongoing at the moment.”

As the pipeline for cat bond issuance continues to build for the fourth-quarter of 2026, Artemis is tracking what will mark only the second ever year where issuance of catastrophe bonds will exceed the $20 billion level.

Regarding risk spreads, Hopmann noted the cat bond market is currently in a softening phase. Spreads have tightened around 15% compared to last year, driven in part by the end of the hurricane season without any losses.

Looking ahead, Plenum said spreads may decline 10% in 2027, although this is obviously dependent on any loss activity as well as any other capital markets effects that could occur.

Hopmann added: “Worthwhile to mention is that this spread development is not uniform across all segments of the cat bond market. We see this spread development also differentiating between different segments of the cat bond market very differently.

“There has been a huge spread decrease as spreads have come down quite significantly in California wildfire but still remain at very high levels. But we also see segments in the market where spreads are increasing, which highlights again the need for selectivity within the market.”

Attention then turned towards this year’s Atlantic hurricane season, as David Strasser, Senior Portfolio Manager responsible for risk modelling, noted that this year’s season has been the quietest on record based on hurricane counts and Accumulated Cyclone Energy (ACE) levels.

Strasser also underscored how El Niño was one of the key drivers, for why this year’s hurricane season was so quiet in the Atlantic. Data from Plenum also showcased how El Niño is going to continue to intensify over the next several weeks, reaching its peak around December. Strasser also said El Niño is expected to dissipate by April 2027, when conditions are forecast to return to ENSO-neutral. He said conditions may remain strong however until around February or March 2027.

“Even though it’s quite early to make a precise forecast, but we can already say that there is a very good chance that the hurricane season next year is going to be more active than what we have seen this year because by the time El Niño will have dissipated,” Strasser added.

“As I mentioned, the peak of El Niño is expected this December, during the winter, and then the question arises as to what could the potential impact be on the cat bond market from this very strong El Niño? The question is ‘Is the riskiness of the cat bond market going to increase or not?’ And the short answer to this question is, we don’t expect the risk in the cat bond market to increase or to change based on this very strong El Niño.”

Strasser explained that Plenum’s reasoning behind this is because the so-called peril-regions that are affected by this very strong El Niño are largely not covered by the cat bond market. As a prime example, Strasser outlined that El Niño could bring coastal flooding and heavy rainfall to California but importantly explained that California flood risk is not meaningfully covered by the cat bond market.

He also noted that wildfire risk in California, which is covered by the cat bond market, could potentially decrease because of the expected wetter conditions that El Niño is expected to bring to the state.

Concluding the webinar, Dirk Schmelzer, Head Portfolio Manager ILS/CAT Bonds and Partner at Plenum, reaffirmed confidence in the asset class.

“We’ve seen that we are currently in a very healthy market. Spreads have come down, but are expected to stay around 5%, so a little bit lower than last year throughout the upcoming 12-month period,” Schmelzer said.

“We maintain a very selective underwriting approach. I think you can clearly see this in the differences, especially to a market weight portfolio on some of the peril regions or structures that we try to underweight significantly. We do not take significant overweight’s in certain peril regions, at least compared to the historical stress tests. There is no single region where we would take more risk because of lowering the risk in other regions. But especially for the dynamic strategy, we maintain a very balanced exposure to the overall cat bond market.”

Concluding: “Cat bonds remain a very diversifying and attractive asset class. Even with spreads being slightly lower than in prior years, and performance coming down with that. It’s an asset class that hedges and immunises very well against geopolitical risk and risk of rising interest rates as cat bonds are floating rate instruments and therefore remain an attractive building block within client portfolios.”