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

Franklin Templeton Investment Solutions, the hedge fund-focused arm of the global asset manager, has moderated its stance on the catastrophe bonds asset class slightly from ‘strongly overweight’ to ‘overweight’ for Q4 2026, which in turn has led the firm to shift its stance on the insurance-linked securities market to ‘neutral’.

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

It’s important to remember that “overweight” on catastrophe bonds remains very positive and means the investment managers continues to see the opportunity in the cat bond asset class as meaningful for portfolios.

Commenting on the cat bond market’s performance in the third quarter of 2026, Franklin Templeton said, “Although there were several notable catastrophe events in August, none resulted in major insured losses affecting the cat bond market. Combined with seasonal factors, cat bond prices stayed strong as the market approached the peak of the Atlantic hurricane season.”

Franklin Templeton also acknowledged that global insured catastrophe losses remained relatively moderate in the first half of 2026, with industry estimates sitting below long-term averages.

The Swiss Re Institute previously estimated that global insured losses from nat cat events reached US $42 billion in the first half of 2026, which the reinsurer said at the time, marked the lowest first-half total recorded since 2020, and 16% below the 10-year average.

In addition, Franklin Templeton noted that several key catastrophe events occurred in August, including earthquakes, floods and wildfires, but stressed that none of these resulted in major insured losses affecting the global cat bond market.

“Atlantic hurricane activity also remained subdued as the season approached its historical peak, broadly consistent with strengthening El Niño conditions. Several tropical storms developed in August, but none intensified into hurricanes. The relatively benign loss environment, seasonal factors and strong investor demand supported cat bond prices and tighter spreads heading into peak hurricane season. While activity has remained subdued, we remain cautious until the season concludes,” Franklin Templeton continued.

“Structurally, we remain constructive on cat bonds, as the market continues to expand, supported by strong investor demand and issuance from both new and returning sponsors. Furthermore, current spreads and yields remain attractive relative to high-yield bonds and the asset class continues to offer low correlation with traditional financial markets.”

Franklin Templeton’s shift on cat bonds is reflected in the firm’s conviction-focused z-score, which has now seen its score decrease from 1.1 in Q3’26, to 0.9 for Q4’26.

While a score of 0.9 sits firmly within the overweight range (defined as +0.5 to +1), cat bonds currently occupy joint second position among the manager’s conviction scores for Q4 2026. Technology leads the rankings with a score of 1.4, whereas fixed income, event-driven-special situations, and discretionary  share the second-place position, each registering a score of 0.9.

As mentioned, Franklin Templeton’s neutral stance on other insurance-linked securities (ILS) remains unchanged.

However, the manager’s conviction score for other ILS has moderately decreased from 0.4 in Q3’26, to -0.1 for Q4’26.

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