Catastrophe bond soft market not yet at 2017 levels, but could last another year: Lane Financial

The current soft market in catastrophe bonds and insurance-linked securities (ILS) is not yet at the depressed levels seen in 2017, analysis from consultancy Lane Financial LLC shows. But the company suggests the soft cat bond market could last another year, if 2026 continues to run loss-free.

In its last analysis of the catastrophe bond market earlier this year, Lane Financial had said that the outstanding market yield of non-impaired natural cat bonds was no longer as soft as it had been at the end of 2025, but the firm also highlighted that investor returns had been eroded by falling secondary market prices.

But the new analysis now shows that prices have continued falling through 2026, resulting in lower weighted average cat bond yields and a multiple across the outstanding non-impaired set of catastrophe bonds of just 1.9 times expected loss.

Back in the first-quarter of 2017, the peak of the previous cat bond soft market, that measure fell to 1.7, the lowest it had been since the data set analysed began in 2005.

In their new analysis, Lane Financial eliminate the effect of the expected loss fluctuating over time, to show the same portfolio of outstanding catastrophe bonds might have priced in the hardest market (the upper-dotted line being 2006) and softest market years (the lower-dotted line being 2016).

As you can see, this shows while the multiple has dropped to 1.9 at this time, it could have further to go and can remain below the softest pricing line for longer if conditions allow and major catastrophe losses remain absent (see chart below).

Lane Financial comments, “Prices are high, yields are low, the market is quite soft. Important questions therefore are – How soft can it get? and – How long can it last?,” adding that, “We have seen softer quarterly markets, but only a few.”

On the chart above they explain, “The area between the two dotted lines represents the range of pricing that can be expected most of the time. The dotted lines themselves are guide-lines for past hard and soft pricing. They are not limits. Clearly some quarters fall outside the lines as the present quarter does. Nor do past extremes necessarily represent the best or worst possible pricings. New pricing extremes can be made, and probably will be, in the future.”

On the current soft level of cat bonds the consultancy states, “The present quarter low is still not the lowest we have seen and could go lower still. That would be unusual in the fourth quarter. Most readings from Q3 to Q4 seasonally tighten pricing as the Jan 1st renewal season approaches. But, as the graph shows, in 2016 there was no seasonal bounce and the softness continued on into Q1 2017. That could happen again.”

Summing up, Lane Financial says, “How long can the soft market last? We do not know. Only the Deities can determine the duration of the soft markets. Declarations of disciplined underwriting sadly do not always prevail. Sudden and large catastrophes that cause a massive loss of capital in the insurance markets are usually the proximate cause of ending a soft market.

“The longest soft market of the past twenty years was four years, from 2013 to 2017. It only ended with the succession of losses from hurricanes Harvey, Irma, and Maria later in 2017.

“If the rest of 2026 runs loss-free then we would expect the soft market to last at least another year (until next year’s hurricane season). However, late forming storms in the Atlantic have happened before and can happen again and still cause big losses.”

You can download a copy of the new Lane Financial paper here.