Legal & General to Hold Cat Bond Exposure Despite Tightening Spreads

Despite a challenging environment of tightening spreads, Legal & General Investment Management (LGIM) intends to maintain its substantial exposure to the catastrophe bond market. The firm, managing a portfolio estimated at a minimum of $400 million, is prioritizing portfolio integrity and seeking more favorable entry points rather than exiting the asset class, according to fund managers Alex Turner and Martin Dietz.

The decision comes as the cat bond market has demonstrated resilience in the face of increasing global catastrophe events. Hurricanes Helene in 2024 and Milton, also in 2024, ranked among the most costly natural disasters in recent history, yet neither significantly impacted cat bond payouts. This was attributed to high levels of market reinsurance and fortuitous landfall locations that largely spared major population centers, as highlighted by Turner and Dietz.

The relative performance of catastrophe bonds has been particularly notable given broader financial market volatility. A Swiss Re report, cited in an American Banker article, indicated that cat bonds exhibited low volatility compared to high-yield bonds, especially following tariff adjustments in early April 2025. The report emphasized the asset class’s low correlation with macroeconomic events.

The cat bond market has experienced a surge in issuance in recent years, with over $17 billion in transactions across nearly 60 deals in the first half of 2025 – the second largest volume since the market’s inception. Despite this increased supply, spreads have tightened as strong realized returns and growing investor interest have driven capital inflows. This compression of spreads, however, presents a challenge to future return potential, according to LGIM.

The market is also evolving beyond traditional perils. Recent activity demonstrates expansion into new geographies and risk types. For example, Migdal Insurance secured $100 million through its debut catastrophe bond, Turris Re Ltd. (Series 2025-1), providing earthquake risk reinsurance protection in Israel. The California FAIR Plan Association issued Golden Bear Re Ltd. (Series 2026-1), a $750 million bond – the largest to date focused on wildfire risk.

Despite the tightening spreads, LGIM notes that catastrophe bonds continue to offer a premium over investment grade and high yield corporate bonds. Turner and Dietz acknowledge that while lower spreads may challenge net returns, the asset class still provides an attractive risk-reward profile for investors. However, they also caution that institutional investors must consider governance implications, as large, event-driven drawdowns can attract scrutiny even when reflecting the inherent nature of the asset class.

The firm’s strategy reflects a broader trend within the insurance-linked securities (ILS) space. The combination of strong returns and increasing sophistication has attracted new capital, contributing to the tightening spreads. LGIM’s approach of maintaining exposure while awaiting more favorable entry points suggests a long-term commitment to the asset class, predicated on its 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,” Turner and Dietz wrote. This sentiment underscores the continued relevance of catastrophe bonds as a diversification tool within a broader investment strategy, even as market conditions evolve.

The firm’s decision to remain invested, despite the current environment, signals confidence in the underlying fundamentals of the catastrophe bond market and its ability to deliver uncorrelated returns. LGIM’s approach highlights the importance of a disciplined investment process and a long-term perspective in navigating the complexities of the ILS landscape.