Inflows of capital to the catastrophe bond and insurance-linked securities (ILS) market are expected to continue in 2026,which could drive as much as a $20 billion increase in capital within the ILS sector, Michael Millette, Co-founder and Managing Partner at Hudson Structured Capital Management Ltd.told Jefferies analysts recently.Behind the expected continuing inflows to the cat bond and ILS asset class are, in part, the fact investors increasingly find the asset class attractive after its now three years of strong returns.But, also due to the fact institutional investor demand for alternative sources of return and diversification continue to rise in a world where other asset classes look overheated and potentially prone to volatile swings.

Millette joined the insurance and reinsurance focused equity analyst team of investment bank Jefferies recently to discuss the state of the market and the outlook for 2026 from his vantage point as investment manager allocating across a wide-range of reinsurance opportunities.Having estimated that around 90% of the roughly $121 billion of alternative capital in reinsurance today is devoted to natural catastrophe risks, Millette said that he anticipates strong growth in ILS capital over the coming year.He estimated that ILS capital inflows could drive sector growth in the region of an additional $10 billion to as much as $20 billion of capital in 2026, which based on the recent pace of growth and rising investor interest does not seem at all unreasonable.

, across 144A and private issuances tracked by Artemis is currently up by more than $8.5 billion since the end of 2024.With in the market, the majority of which is likely to settle this year, and only just over $1.5 billion of cat bonds still to mature this quarter, the outstanding market measure could rise by roughly $11.5 billion in 2025 alone.Given growth is also being seen in collateralized reinsurance, retrocession and private ILS fund strategies as we approach year-end, according to our sources, while other more nascent areas of ILS are also evidently expanding (such as casualty), this year could see alternative capital experiencing one of its most meaningful periods of expansion on record it seems.

Millette highlighted the chance this pace of ILS capital expansion persists into 2026, forecasting the $10 billion to $20 billion range for new capital inflows and citing “a potentially overheated equity/bond market increases institutional demand to diversify into alternative assets,” according to the Jefferies analyst team.He anticipates catastrophe bonds could continue to take a larger share of this than collateralized reinsurance in 2026.With pricing now softening across reinsurance, Millette said the longer-duration of catastrophe bonds is a good way to lock in higher levels of pricing too.

With global financial equity markets deemed frothy, in valuation terms and potentially prone to volatility by many analysts at this time, while other bond and credit markets are coming under increasing scrutiny, there has been a definite trend for large institutional investors to explore more alternatives again this year.As Millette rightly points to these global trends as potential drivers for increasing investor interest and appetite for ILS investments, it does also raise questions for how persistent the softening reinsurance price cycle will be this time.Millette also pointed to specialty lines during his time with the Jefferies analysts, highlighting cyber risks as the area attracting most interest from the capital markets.

He was also deemed “cautiously optimistic” on casualty ILS, but noted that performance of these still relatively new structures such as casualty sidecars is harder to gauge at this time given their longer durations and the fact the cost of capital for casualty risks can remain unknown for longer as a result.Millette’s forecast for potential capital expansion in ILS for 2026 seems entirely reasonable given the track-record of returns and the growth of the sector seen in 2025.As ILS capital grows, with the largest appetite being for higher-layer property catastrophe risks in catastrophe bond form, it seems the opportunity for protection buyers to lock-in multi-year securitized protection may prove a sustained trend and this bodes well for catastrophe bond market growth into the future.

As ever, there remains the key question of how competitive traditional reinsurance capital may prove to be over those higher-layer opportunities where cat bonds are becoming more prevalent? Or whether the ability to buy more protection at attractively priced spreads could serve to fuel demand for efficient, capital markets backed protection, to counter the competitive trend to a degree and sustain a more stable, relatively attractive (compared to other opportunities to deploy their capital) level of returns that the ILS investor flows are seeking access to..All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance can be accessed online.Our can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.