Returns Drive Investor Appetite as Reinsurance Capital Grows
Investors are maintaining or increasing their allocations to the insurance-linked securities (ILS) market as recent solid returns have encouraged appetite for these assets. Rating agency AM Best noted that this sustained demand is raising the importance of third-party reinsurance capital as a key component of global capacity. The agency recently updated its forecast for this sector, raising its end of 2025 estimate to $123 billion from a previous projection of $120 billion. AM Best and broker Guy Carpenter now predict the figure will climb to $130 billion by the end of 2026.
Market momentum expands with record issuance
This growth is driven by robust investor demand for catastrophe bonds and other ILS instruments. Momentum for catastrophe bonds has expanded significantly over the last year. Following a record-breaking 2025 where annual 144A issuance reached an unprecedented $25.6 billion, the first half of 2026 continued this historic pace. The market set a new first-half issuance record of nearly $18 billion, lifting the total outstanding market size to an all-time high of approximately $65.6 billion at the end of June.
AM Best highlighted that the ILS market has also benefited from an influx of capital seeking attractive risk-adjusted returns and diversification benefits associated with insurance risk. The agency explained that strong market performance has supported the recycling of investor capital. Returns generated by the ILS market have encouraged existing investors to maintain or increase their allocations while attracting additional capital to the sector.
Related: Cat bond yields show steadying market trends
Expanding capacity strengthens resilience
This expansion of the ILS market aligns with broader reinsurance market resilience. In its report, AM Best outlined that the global reinsurance market entered 2025 from a position of considerable financial strength and continued building capital throughout the year. Both traditional and third-party capital reached record levels during this period. Traditional reinsurers generated another year of strong underwriting and investment earnings, allowing the industry to retain capital even as companies returned capital to shareholders and pursued growth opportunities.
At the same time, the ILS market continued to attract investors seeking exposure to insurance risk that remains relatively uncorrelated with broader financial markets. The agency recently stated that reinsurers are benefiting from maturing partnerships with alternative capital providers. These partnerships help them to consistently exceed their capital costs. The continued rise of third-party capital provides a necessary buffer against catastrophic losses, ensuring that capital is available when it is needed most to cover large-scale events that could otherwise overwhelm traditional reinsurance markets.
