Investors are pouring into catastrophe bonds and wider insurance-linked securities (ILS) at a pace that kept first-quarter issuance within touching distance of last year's record, reinsurance broker Gallagher Re said, as allocators chase yield in a softening reinsurance market.
Q1 2026 brought $6.7 billion of cat bond and related ILS issuance across a record 35 deals, just short of the $7.1 billion notched in the same quarter of 2025. The outstanding cat bond market finished March at an all-time high of $63.9 billion.
The wall of capital is starting to bite on pricing. Gallagher Securities said cat bond prices fell more than 20% year-on-year in early March, with multiples running about 30% below where they sat two years ago.
Roughly 18% of Q1 issuance covered riskier tranches with expected losses beyond the 1-in-25-year return period, a sign investors are stretching for spread.
Returns are also coming off the boil. The Swiss Re Global Cat Bond Performance Index delivered 11.40% in 2025, a third straight double-digit year but well below the 17.29% logged in 2024.
Swiss Re warned that softening across cat bonds, ILS and reinsurance renewals has "declined" the return outlook, and said "double-digit total returns seems a far less likely outcome for the market benchmarks in 2026."
The ILS menu is widening. Sidecars and structured debt and equity deals now sit alongside cat bonds, each offering a different trade-off between liquidity and yield.
Aon pegged total alternative reinsurance capital at $136 billion at the end of 2025, including $17.9 billion in property sidecars and $1.7 billion in casualty sidecars. Brokers expect casualty sidecar capital to roughly double this year.
Cat bonds remain the anchor of the asset class, valued for liquidity, transparency and scale. But cedents struggling to offload casualty risk through a bond market still dominated by property catastrophe are increasingly turning to sidecars.
Schroders Capital senior investment director Mark Gibson recently summed up the trade-off: "Public cat bonds offer liquidity, transparency, and standardization – but at the cost of lower spreads and mark-to-market volatility. Private ILS provide customization and potentially higher returns – but introduce illiquidity, operational complexity, and greater dependence on manager expertise."
Gallagher Re and Gallagher Securities polled more than 60 investors, 94% of them with direct allocation authority. More than 70% of respondent firms manage above $1 billion, and 16% above $100 billion. Full findings are due next month.
About 90% of those surveyed plan to lift allocations to ILS and alternative insurance assets over the next two years. Insurance-related holdings already average 12% of portfolios, with some allocators above 50%.
Sidecars and structured deals are drawing a narrower, more specialist base willing to underwrite bespoke risk for a higher return.
"This is a unique moment: Capital conditions are favorable, investor appetite is strong and structures are evolving," said Jason Bolding, global head of ILS at Gallagher Re.
