Hurricane season may be months away, but predictions have already begun. Forecasters begin their modeling in December, and The Climate Forecast Applications Network has already dropped its first extended-range outlook for the 2026 Atlantic hurricane season. The main takeaway is that we’re expected to have a relatively calm season, but as investors know, “calm" and "safe" are not the same thing. Let’s take a closer look.
Looking at the Numbers
Looking at more data from the Tropic Storm Risk (TSR) group, early predictions call for 14 named storms, 7 hurricanes, and 3 major hurricanes which sits right around the 30-year historical average. The season's Accumulated Cyclone Energy (ACE) index, a measure of overall storm intensity and duration, is projected at 125 units, right in line with long-term norms. In other words, forecasters aren't yet sounding any alarm bells.
So far 2026 is tracking on average, but that doesn’t mean surprises aren’t in store. When we look at the last two years, 2024 and 2025, they couldn’t have been more different, and both carry lessons for investors. The 2024 season was incredibly active with 18 named storms, 11 hurricanes, and was the third-costliest on record incurring billions of losses. Hurricanes Helene and Milton were both catastrophic, and 2024 was the ninth consecutive above-average season.
2025 was wildly different. The season produced just 13 named storms and 5 hurricanes, which were below the forecast, but 4 of those 5 became major hurricanes. Hurricane Melissa, the season's most notable storm, triggered Jamaica's $150 million parametric cat bond but didn't impact the U.S. It’s an interesting comparison to 2024 - fewer storms doesn't mean no risk, and intensity and location can change everything.
Parametric triggers can create mismatched basis risk. Bondholders could potentially be “off the hook” when insurers have to absorb significant losses because the storm damage didn’t track against certain coordinates, or insurers could suffer only modest losses while investors lose capital because those certain parameters were met. And regardless if a cat bond is activated or not, they can still experience liquidity and price fluctuations after significant disasters before the total losses derived from the event are fully known.
What to Watch Out For: El Niño
The main reason for the tempered outlook is a potential shift in the El Niño-Southern Oscillation (ENSO) pattern. We're currently transitioning out of La Niña, which typically fuels Atlantic hurricane activity, toward a moderate or even strong El Niño by mid-to-late summer. NOAA has already issued an El Niño Watch, with roughly a 62% chance of El Niño developing between June and August. If El Niño arrives on schedule, it will more than likely suppress activity. That said, it isn’t a definitive indicator. In fact, the last three category 5 hurricanes to hit the US all occurred during weaker El Niño conditions.
Another Consideration - Warm Water
Another wrinkle for 2026 predictions is that Atlantic sea surface temperatures are warmer than average - and warm ocean water is key for hurricane development. When we consider this against the shifting ENSO pattern, 2026 conditions could set up a tug-of-war, with El Niño trying to push activity down and warm Atlantic waters pushing it back up.
What This Means for Cat Bond InvestorsAnother Consideration - Warm Water
Heading into 2026, spreads have tightened considerably from their post-Hurricane Ian peaks in 2023. That's good news for sponsors because reinsurance is cheaper to buy, but it means investors are accepting less compensation per unit of risk than they were two years ago. A near-average hurricane season forecast is one reason spreads aren't widening because the market is pricing in a manageable year.
But watch the calendar. Spreads in the secondary market can widen as summer approaches and hurricane risk becomes real. If El Niño stalls or Atlantic waters stay warm, forecasters will revise upward in April and June, and the market will re-price accordingly. For investors holding hurricane cat bonds, a near-average season forecast usually means tighter spreads and better pricing for new issuances. However, there is another X factor to consider. TSR's December 2024 forecast for the 2025 season looked almost identical to this one, and 2025 still produced four major hurricanes. Storm counts are directional at this stage, not set in stone.
For now, 2026 isn’t waving red flags about hurricane activity, but forecasts will crystallize in May and June as El Niño's trajectory becomes clearer. Stay tuned.
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Sources
World Meteorological Association
National Oceanic & Atmospheric Association (NOAA)
World Bank