Cat Bond Surge Expands ILS Capacity, Softens Reinsurance Pricing

Reinsurance pricing at the June 2025 renewals dropped roughly 10 percent on a risk-adjusted basis, the most cedent-favorable pricing in years, according to a new report by AM Best. The decline reflects heightened competition among capital providers and record-breaking issuance of 144A property catastrophe bonds. 

The Best's Market Segment Report, "Record CAT Bond Issuance Boosts ILS Capacity and Reshapes Pricing Landscape," outlines how recent dynamics in the insurance-linked securities (ILS) market are reshaping the broader reinsurance landscape. Although pricing softened overall, reductions varied by layer. Upper layers of reinsurance towers saw average rate drops in the high single digits, while lower layers were flat to slightly down. AM Best also noted that demand has increased in Florida, driven by the emergence of new startup insurers and further depopulation of the state-run Citizens Property Insurance. 

A surge in catastrophe bond issuance during the first half of 2025 contributed to greater capacity, with new sponsors entering the market. Notably, small- and mid-sized insurers have increasingly turned to capital markets for reinsurance alternatives. "The capital markets allow these insurers access to a broad range of investors, and the insurers in turn can get fully collateralized multiyear reinsurance," Emmanuel Modu, managing director at AM Best, said. 

While ILS market performance began the year sluggishly—affected by January wildfires in California—returns turned positive from February through June, albeit at lower levels than the same period in 2024. "Full-year 2025 cat bond market returns are unlikely to match the levels observed in 2024; however, spread levels on the in-force deals and current levels of collateral yield suggest the 2025 return will be higher than the average observed from 2017 to 2022," Wai Tang, senior director at AM Best, said. 

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