Despite softening spreads, cat bond risk premium remains among widest available: Sage Advisory

Despite softening spreads driven by record inflows of capital, catastrophe bonds continue to offer one of the widest net risk premia available across financial markets, according to a new report from Andrew Poreda, Vice President and Senior Research Analyst at Sage Advisory Services.

In the report, Poreda also highlights that catastrophe bonds delivered a steady 7.6% return across eight consecutive months in 2026 with minimal volatility.

Sage Advisory ventured into the insurance-linked securities (ILS) market for the first time last year through its partnership with Cedar Trace Group, the Bermuda-based insurance, reinsurance and asset management specialist, that sees the two companies working together to create and deliver ILS-enhanced credit opportunities to investors.

In the firm’s latest report, Poreda explains, “The Atlantic hurricane season is at its statistical peak, and the most interesting thing about the catastrophe bond market right now is how little it has had to say. While equity and credit markets have spent the year re-pricing the same two questions — what happens to rates, and whether the capital being poured into AI and data centers earns its keep — the cat bond market has quietly gone about compounding an insurance risk premium that has nothing to do with either.”

The VP states that this distinction is a key point, particularly because catastrophe bonds derive their returns from a fundamentally different source of risk than the one driving most portfolios today.

In addition, Poreda observes that through the first eight months of 2026, the Swiss Re Global Cat Bond Index returned 7.6%, building on the 4.1% it posted through mid-year and on the heels of an 11.4% total return from 2025, its third consecutive double-digit year.

The report states that the Swiss Re Global Cat Bond Index has seen eight consecutive positive months in 2026, ranging from +0.5% to +2.2%, with no down month, with August being its best month of the year so far at +2.2%, which was earned in the quiet run-up to peak season while equities were still digesting the July AI sell-off.

“Over the trailing 10 years through 8/31/2026, the index has delivered roughly a 7.4% annualized return with a standard deviation under 4% and a Sharpe ratio near 1.55 (Sage, computed from Swiss Re Global Cat Bond Index data). That is a risk-adjusted profile that stands ahead of high yield, the U.S. Aggregate, and most credit-sensitive categories over the same window. None of that return was manufactured by duration, spread compression, or an earnings cycle. Cat bonds carry a floating-rate coupon, so a rising-rate environment reduces duration risk without touching expected loss — a structural benefit with no structural cost,” Poreda explained.

Poreda also notes that most asset classes claim diversification when things are calm, whilst acknowledging that as the Atlantic hurricane season reaches its climatological peak, catastrophe bonds are moving into the window that directly tests their underlying risk.

While the 2026 season has been historically inactive, Poreda stresses that that the absence of significant storm development does not guarantee safety. The peak season period still carries the year’s greatest risk, given that it only takes one landfall to change the arithmetic.

“But that is precisely the risk an allocator is being paid to hold. It is peril risk, priced and modeled, not another claim on corporate earnings or the AI capital cycle. When the S&P 500 has fallen over the past decade, cat bonds have posted positive returns in roughly 79% of those months (source: Sage, from monthly Swiss Re Global Cat Bond Index and S&P 500 total-return data, 10 years through 8/31/2026). That is not a statistical accident; it reflects a different driver of return entirely,” the report reads.

Adding: “The independence of the return driver is one half of the argument; the size of the compensation is the other. To compare fairly, every risk premium below is measured the same way: as the excess return over the risk-free rate that an investor earns after subtracting the risk each asset carries — credit losses for corporate bonds, modeled catastrophe losses for cat bonds. This is the same net, excess-return basis on which the equity risk premium is defined, so the four are directly comparable. For cat bonds, we deliberately use the premium on new issuance: the pricing an allocator putting capital to work today would receive, not the tighter spread on a seasoned book.”

In terms of risk being priced today, so new cat bond issuance, the average deal carries a spread of roughly 6.9% over its risk-free collateral against an average modeled expected loss of roughly 3.2%.

Using Artemis’ data, Poreda notes that the spread above expected loss was 3.74% during the second quarter of 2026, a key figure, representing a significant achievement: the first sub-4% quarter in twenty consecutive quarters, resulting directly from record capital entering into the market.

“Even after two years of softening, it remains one of the widest net premia available anywhere,” Poreda noted.

Further data in the report also highlights how cat bonds offer an attractive return premium of 3.74%, dramatically outperforming U.S. high-yield (0.44%) and U.S. investment-grade (0.75%) after adjusting for defaults.

“Two cautions keep this defensible. First, cat bonds are not “cheap”: ILS pricing has softened materially from the post-2022 peak as record capital has entered the market, and the 3.74% spread above expected loss was itself the tightest quarter in five years. The argument is relative, not absolute. Second, this is not a claim that cat bonds outyield equities; net of expected loss, the peril premium still sits modestly below the equity risk premium. What matters is that they pay a premium closing nearly all of the gap to owning the entire stock market, for a fundamentally different, uncorrelated risk,” Poreda added.

“Eight months into 2026, the scarce thing isn’t equity risk, credit risk, or duration — most portfolios are saturated with all three. The scarce thing is a return stream driven by something fundamentally different, and the ability to actually reach it. Equities generated a higher total return year-to-date (+13.1% vs. +7.6%), but cat bonds delivered their 7.6% through eight straight positive months, a fraction of the volatility, and without requiring a single call on rates, AI adoption, economic growth, or corporate earnings. And they did it while paying a peril risk premium — net of expected loss, and even after the tightest quarter in five years — that closes nearly all of the gap to owning the entire stock market,” Poreda continued.

Concluding: “In a market defined by everything moving together, an asset that spends peak season doing its own thing — and pays a premium that rivals the reward for equity risk — is worth a second look. In an environment where genuine diversification has become the scarcest commodity in a portfolio, the insurance risk premium is one of the few places an allocator can still find it.”