In the current market environment, cedents choosing to sponsor catastrophe bonds can benefit from more favourable economics than with traditional reinsurance covers in some risk layers, rating agency AM Best has said.AM Best has published a detailed new report on catastrophe bonds and insurance-linked securities (ILS), describing the ILS market as having grown from niche to established, with cat bonds in particular becoming “a core component of reinsurance programs rather than an opportunistic tool.” Across ILS, AM Best is projecting further growth for 2026, but believe this could be at a slower pace than we saw last year.The main reason being that the rating agency anticipates some “investors might take some profits rather than redeploy as the market continues to soften,” which is something already being seen in how assets under management are stabilising at certain manages of ILS strategies after three very strong year’s of returns., which represented 12% growth in outright ILS and alternative capital over last year.

Summarising the current situation, AM Best states in the report, “Insurance-linked securities (ILS) capacity continues to reach record levels.The ILS market has grown from niche to established with returning sponsors/cedants.Investors’ understanding and confidence in the market has grown.

Catastrophe (cat) bond issuance has become routine, as sponsors appreciate another source of capacity, and investors recognize the attractive returns and diversification benefits.The growing market gives investors more opportunities to invest.The market is also expanding with more perils and geographies.” Catastrophe bonds have been the major drivers of growth, but AM Best notes that the capital flowing in and earnings made by investors have swelled the market’s coffers, leading to softer rates which the rating agency cautions, “could slow the rate of further deployment into this segment.” But AM Best adds, “Diversification benefits and expanded peril coverage will also continue as drivers for capital inflow into the ILS market.

As the property cat market softens, ILS fund managers may continue to look at other risks, such as casualty ILS.” Demand for reinsurance capacity continues to rise, with multi-year capacity options from cat bonds and ILS benefiting from that.But investors are becoming more adventurous in response to the softening of the market, AM Best says, explaining that, “With the cat bond market softening, investors are exploring ways to attain higher yields.Investors are allocating capital in line with their risk-return objective: some focus on risk-remote layers and accept lower yields in a soft market, while others seek higher returns or broader risk exposures by supporting lower-attachment transactions and private ILS deals, where yield compression has been less pronounced.” However, for the catastrophe bond, the role it is cementing itself in reinsurance continues to solidify, with cat bonds having “increasingly become a core component of reinsurance programs rather than an opportunistic tool,” AM Best says.

Cedents are attracted to the multiyear nature of cat bond capacity, allowing them to secure pricing certainty across different market cycles the rating agency explains.Adding that there is now a pricing differential in some areas of the market, as, “In the current market environment, cat bonds often offer more favorable economics than traditional reinsurance in some risk layers, reinforcing their role as a cornerstone of risk transfer strategies.” AM Best qualifies this by highlighting that, “However, cat bonds still predominantly cover the more risk-remote layers of reinsurance towers and play a complementary role with traditional reinsurance.” It’s notable that the rating agency is highlighting the economic efficiency of catastrophe bond sponsorship at this time, for reinsurance cedents.The cost-benefit of accessing the catastrophe bond market at spread multiples that are now greatly reduced, while locking in multi-year reinsurance protection at these lower prices, is serving to attract more sponsors to the catastrophe bond market.

Of course, it’s important to also note that while their can be a delta between cat bond and traditional reinsurance pricing at certain layers and for certain perils, it is by no means a market-wide phenomenon, given the differences in coverage available as well as the lack of contract features such as reinstatements in the catastrophe bond market.But, for the right risks and in the right layers, where reinstatements etc may not be deemed as necessary, the benefits of securing long-term reinsurance at attractive pricing will surely continue to attract sponsors to try out the 144A market this year.The situation is likely to stabilise over the rest of this year it seems, as investor’s costs-of-capital have not changed, even if they have had a number of year’s of strong earnings from the cat bond and ILS asset class.

But, for now, there is a clear opportunity for cedents with adequately large reinsurance needs to access the catastrophe bond market to benefit from the favorable economics that AM Best is referring 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.