Analysis
This analysis examines how cat bond sponsors are testing the limits of a softening market while spreads stay surprisingly resilient. We show how soft-market features like cascading structures, third-event tranches and peril expansion are creeping back into deals, why managers are pushing back to hold the line on discipline, and how spreads actually firmed in Q1 even as those structures spread. It delivers fast insight on where pricing sits against the 2016 and 2023 cycles, what could drive a further tightening this year, and why an unusually large risk-free contribution is keeping the asset class attractive and capital stickier than in past soft markets.
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Soft-market features have been introduced to several bond deals this year, with cascading structures, third-event tranches and peril expansion all signalling the softer conditions, according to managers canvassed by this publication.
Cat bond managers have pushed back where possible on these structures, hoping to retain some discipline in the market, however excess capital has meant that cedants often secured the desired limit on the deals.
One cat bond manager said: “We are somewhat concerned that discipline is beginning to weaken.”
Deals featuring softer market structures included Nationwide’s Aquila Re 2026-1 A note and SageSure’s Gateway Re 2026-1 AAA-2 tranche.
Aquila Re’s Class A note provides indemnity, per-occurrence protection with a cascading structure, a first for the sponsor.
For the first and second events, the bond attaches at $1.95bn, with traditional reinsurance layers inuring to the benefit of the Class A tranche, sources said.
Those lower traditional reinsurance layers can be reinstated one time if exhausted by a first event.
The Class A note’s attachment point drops to $750mn should two events within the same risk period fully erode the traditional reinsurance layers.
As a result, the Class A starts at a remote attachment point but moves down the tower and by the time a third event strikes, the risk level of the note would have increased significantly.
Elsewhere, SageSure’s Gateway Re 2026-1 AAA-2 provides third-event cover on an annual aggregate basis, a new structure for the sponsor.
The tranche is split into two sections: Section A, providing per-occurrence protection, and Section B, providing annual aggregate protection on a third-event basis.
Section B attaches at $200mn, with a $50mn event deductible and a $100mn event limit.
As a result, three $100mn events would generate $150mn of loss to the tranche, leaving the note untriggered.
By contrast, three $150mn events would generate $300mn of loss to the tranche, causing the note to attach.
Third event is more remote compared second event or aggregate covers without event deductibles, which had been seen in prior soft markets, sources noted.
However, away from structural changes, cat bond spreads remain attractive compared to historical soft cycles and to competing asset classes.
Spreads rebound in Q1
Spreads increased in Q1, even though there were deals being placed with structures typically associated with softer market conditions, according to a report from Lane Financial.
The firm’s Q1 report said that average secondary market yields, a proxy for rate-on-line (RoL) premium levels, rose to 5.98% as of 31 March 2026 from 5.14% at the end of 2025.
The move was driven by average expected losses rising to 2.45% from 2.39%, suggesting investors are holding firm around getting more compensation for taking on more risk.
One cat bond manager said: “The fall has been hard and fast, but pricing is still at an adequate level.”
The pricing trend signalled a move away from soft market conditions towards a more neutral environment, sources said.
Coming down from historical highs
Spreads were down around 50% from the post-Ian peak reached in January 2023.
Spreads stood at 5.61% in the first week of May, versus a peak of 11.31% in the second week of January 2023, according to yield data provided by Plenum.
One cat bond manager said: “Compared with the previous soft market in 2016, the current environment is not yet as severe.”
However, spreads could tighten further this year for two reasons: a clean catastrophe year and non-renewal or smaller renewals of cat bonds.
Sources estimated a further 10%-20% reduction in spreads by the end of 2026 if there is a fourth successive year with no major landfalling hurricane.
One cat bond manager said: “Another year of high single-digit returns and no major cat event for our fund will see a build-up of excess capital that will put further pressure on spreads towards the end of 2026.”
Florida Citizens and the Texas Windstorm Insurance Association called $2.35bn of limit from the market ahead of the scheduled redemption for their respective Everglades Re and Alamo Re cat bonds.
The sponsors then placed $1.35bn of limit, removing $1bn from the market.
Sources also noted that other sponsors may decide against renewing their cat bonds in 2026.
More attractive versus competing asset classes
While spreads have softened from historic highs of around 11% in Q4 2023, cat bonds remain attractive versus US bonds.
Sources said cat bonds remain attractive in part because the risk-free component is supporting returns, while non-correlation benefits have been reinforced by geopolitical turmoil.
The risk-free component of a cat bond accounts for roughly 40% of total yield at present.
Today’s softer ILS market is supported by this unusually large contribution from the risk-free rate, which is keeping total yields high.
That contrasts with prior soft market cycles in 2016 and 2020, when near-zero rates meant returns were driven almost entirely by spreads, according to yield data provided by Plenum.
This suggests that while terms and conditions are softening, risk spreads and total yields have not yet reached levels that would prompt investors to rethink allocations, supporting the asset class’s attractiveness.
This may support further softening, as capital that would have once exited in the space in previous cycles becomes stickier.
By Jai Singh
26 May, 2026
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