Despite tighter spreads in the catastrophe bond market, Legal & General (L&G) intends to maintain its exposure to the asset class, with Alex Turner, Fund Manager Assistant, and Martin Dietz, Head of Diversified Strategies, noting the firm is prioritising portfolio integrity while awaiting more favourable entry points, rather than rotating out of the space.
The organisation’s cat bond portfolio has reached hundreds of millions of dollars in size, although the precise amount remains undisclosed and difficult to track. Fund documents seen by Artemis suggest a minimum of US $400 million, but likely more.
In a recent article, Turner and Dietz of Legal & General Investment Management highlighted that whilst the cat bond market has delivered a historic three-year run, tightening spreads challenge forward-return potential in the sector.
The authors emphasised that the market has shown a robust performance despite the recent surge in hurricane activity observed over the past three years.
“Despite the hurricane activity over the past three years, the cat bond market has benefited from limited insured losses. For example, Hurricane Helene in 2024 was ranked among the 15 most costly natural disasters globally since 1900, and Hurricane Milton (also in 2024) was one of the strongest Atlantic hurricanes on record. Yet, neither had any meaningful impact on cat bonds due to the high levels of market reinsurance and fortunate locations of landfall, avoiding the largest urban centres,” the authors wrote.
“In 2025, we saw five hurricanes develop in the Atlantic Basin, but for the first time in a decade none made landfall in the US. In effect, there have been a series of notable catastrophe events, yet none has been material to the cat bond market.”
As well as this, a combination of strong realised returns, and growing maturity within the insurance-linked securities (ILS) space has encouraged meaningful inflows of new capital within the market.
However, as supply has struggled to keep pace with this influx, spreads have compressed, which has come despite record issuance of catastrophe bonds being seen in 2023, 2024 and 2025.
The authors also acknowledged how the cat bond market has recently expanded into new geographies and peril types.
Among these expansions is Israel, which saw the introduction of earthquake risk reinsurance protection within the region from Migdal Insurance’s $100 million debut Turris Re Ltd. (Series 2025-1 cat bond issuance.
As well as this, the cat bond market has also continued to expand into wildfire risk, where just towards the end of 2025, we saw the California FAIR Plan Association secure what has now become the largest catastrophe bond exposed to wildfire risks ever, through its $750 million Golden Bear Re Ltd. (Series 2026-1) issuance.
Although these lower spreads now being seen in the catastrophe bond market may challenge net returns, Turner and Dietz noted that cat bonds still deliver a notable premium over investment grade and high yield corporate bonds.
“While, in our view, this provides an opportunity for investors to selectively invest in well-rewarded risks to maintain performance in a declining spread environment, institutional investors face governance considerations when taking concentrated exposure. Large, event-driven drawdowns can attract heightened scrutiny, even when they reflect the nature of the asset class rather than deficiencies in process,” Turner and Dietz added.
Concluding: “Despite these headwinds, catastrophe bonds have retained their defining strength of low correlation with mainstream asset classes.
“In our view, for investors adopting a total-portfolio perspective, selective exposure to the most attractively priced insurance risks can still play a potentially valuable strategic and dynamic role.
“As multi-asset investors we aim to maintain exposure to the asset class whilst awaiting more favourable entry points without sacrificing broader portfolio integrity.”
