Franklin Templeton lifts cat bond conviction to strongly overweight, stays neutral on other ILS

Franklin Templeton Investment Solutions, the hedge fund-focused arm of the global asset manager, has updated its stance on catastrophe bonds from ‘overweight’ to ‘strongly overweight’ for Q3 2026, citing the asset class’s attractiveness, while its stance on other ILS remains unchanged at ‘neutral’

The second quarter of 2026 saw catastrophe bond and related insurance-linked securities (ILS) issuance hit nearly $11.33 billion, as a total 48 transactions came to market, making it the most active quarter for catastrophe bonds in the market’s history.

“Catastrophe bonds have continued to grow in 2026, supported by strong issuance, transaction upsizings and first-time sponsors, while manageable first-half losses have helped sustain favorable conditions,” Franklin Templeton explained.

In total, Artemis recorded nine new market entrants that sponsored their debut catastrophe bonds in the second-quarter of 2026, an impressive number that broke the previous record, which was 8 first-time sponsors seen in both Q2 2025 and Q2 2007.

Turning attention towards the 2026 Atlantic hurricane season, which began on June 1st, Franklin Templeton acknowledged that most major forecasters are projecting for near-average activity this season as El Niño conditions are expected to develop during peak months.

“Seasonal forecasts are useful but are only one input; catastrophe bond outcomes depend more on storm track, landfall, insured exposure and loss characteristics, as a single major hurricane can materially affect the market,” the firm explained.

At the same time, Franklin Templeton noted that cat bond spreads have moderated from post-2022–2023 dislocation levels but rebounded from the lows that were seen in late 2025.

“We continue to view catastrophe bonds as attractive, offering compelling risk-adjusted return potential and diversification benefits given their low correlation with traditional assets,” the firm added.

Franklin Templeton’s stance on cat bonds is reflected in the firm’s conviction-focused z-score, which has now seen its score rise to 1.1 for Q3 2026.

While a score of 1.1 sits firmly within the strongly overweight range (defined as > +1), cat bonds currently sit in third place of the manager’s conviction scores for Q3 2026, with technology sitting in second with a respective score of 1.6, and health care sitting in first place with a respective score of 2.0.

Meanwhile, Franklin Templeton’s neutral stance on other insurance-linked securities (ILS), which includes private collateralized reinsurance, retrocession, and industry loss warranties (ILWs), remains unchanged.

In addition, the manager’s conviction score for other ILS also remains unchanged at 0.4 for Q3 2026.

Across all ILS assets as a group (so cat bonds and then “other ILS”), Franklin Templeton’s conviction remains overweight.

As we’ve highlighted before, many allocators still see a compelling investment case for catastrophe bonds, even following the recent price softening. A key driver is that while spreads have narrowed, attachment points and core terms and conditions have not meaningfully weakened for over three years now.