Franklin Templeton moderates cat bond conviction to overweight, remains neutral on other ILS

Franklin Templeton Investment Solutions, the hedge fund-focused arm of the global asset manager, has moderated its stance on catastrophe bonds from ‘strongly overweight’ to ‘overweight’. Despite this shift, the manager maintains that the asset class remains attractive.

Meanwhile, the firm’s neutral stance on other insurance-linked securities (ILS), including private collateralized reinsurance, retrocession, and industry loss warranties (ILWs), remains unchanged.

Commenting on the cat bond market’s growth in 2025, Franklin Templeton said: “While compressing yield, robust investor demand continues. Total catastrophe (cat) bonds outstanding has grown to approximately US$60 billion at the end of December 2025, about 20% growth year-over-year (y/y). While the yield has dropped to below 9%, cat bonds remain attractive with compelling risk-adjusted returns and low correlation.”

Franklin Templeton’s shift on cat bonds is reflected in the firm’s conviction-focused z-score, which has now dropped from 1.4 from the fourth quarter of 2025 to 0.9 for the first quarter of 2026.

While a score of 0.9 still sits firmly within the overweight range (defined as +0.5 to 1.0), cat bonds now sits below health care, which has now been placed at the highest place of the manger’s conviction scores for Q1 2026.

As mentioned, Franklin Templeton is maintaining is neutral stance on other ILS. However, the conviction score has seen a slight increase, climbing from 0.0 in Q4 2025 to 0.4 in Q1 2026.

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

While the first half of 2025 included a number of key natural catastrophe events that drove meaningful insured losses, the hurricane season itself was relatively quiet, with only a few storms, such as Hurricane Melissa, having a limited financial impact on the market.

“Global insured losses for 2025 are estimated at approximately US$110 billion, extending the trend of losses exceeding US$100 billion annually since 2021, though below the 2024 estimate of US$140 billion. Primary perils such as hurricanes and earthquakes were relatively subdued last year, while secondary perils—including severe convective storms and wildfires—continued to be major loss drivers, particularly in the United States,” Franklin Templeton said.

Looking ahead to 2026, Franklin Templeton expects the catastrophe bond market to remain active and continue to grow.

“Sponsors are focused on securing alternative capital to manage balance sheets, while investor demand remains strong following a year without major losses in 2025 and should attract both existing investors and new investors to the asset class as well,” the firm added.

“Tighter spreads and lower policy rates have compressed yields. However, the asset class continues to look attractive to us, offering compelling risk-adjusted returns and strong diversification benefits compared to other strategies. With these advantages and supportive market dynamics, we expect this favorable environment to persist well into 2026.”

Looking forward, Franklin Templeton expects the catastrophe bond market to maintain its growth trajectory.

Notably, the firm highlighted that institutional interest is evolving; citing Morgan Stanley research, they noted that investors increasingly view cat bonds and ILS not just as diversifying assets, but as climate adaptation investment opportunities.