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ILS and cat bonds gain appeal as El Nino risk nears 2026
VP Bank says US NOAA probability forecasts point to a possible super El Nino starting September 2026, which could coincide with a quieter Atlantic storm season projected at 9 named storms, but ILS returns will hinge on where hurricanes form and land.
Insurance-linked securities and cat bonds are being positioned as a diversification tool ahead of a potential super El Nino in 2026, according to commentary from VP Bank, authored by Senior Investment Strategist Bernhard Allgäuer and summarized by Artemis.
Allgäuer cited US National Oceanic and Atmospheric Administration probability forecasts suggesting a super El Nino could emerge from September 2026 and said the resulting extreme weather is especially relevant for investors in ILS and catastrophe bonds. He also pointed to a Colorado State University tropical meteorology forecast for 2026 that expects a reduction in Atlantic hurricane activity, driven by strong El Nino conditions and higher vertical wind shear.
The CSU team projects 9 named storms, 4 hurricanes, 1 major hurricane, and a seasonal ACE index of 50 for 2026. Still, Allgäuer stressed that ILS performance depends critically on hurricane track details, noting that past years with storms staying over open water or landing in less populated areas could limit insured losses, while a single storm affecting a densely populated region can drive severe damage.
Allgäuer added that ILS returns reflect insurance premiums and the rate of return on the collateral fund, not just catastrophe loss levels. He referenced Hurricane Ian in 2022, which caused total losses exceeding USD 100 billion, and said insurers’ loss absorbing capital fell amid bond-market losses from rising interest rates, leading to higher reinsurance demand and a rise in ILS related insurance premiums from 5% to 11%, while the collateral fund return rose to 4.6% after the prior zero interest rate period.