Alternative capital has crossed into territory long dominated by traditional reinsurers. Insurance-linked securities (ILS) has expanded beyond peak property catastrophe risk and into casualty lines and lower reinsurance tower layers, according to Aon Securities' 20th annual ILS market report.
Total ILS market capital reached US$144.5 billion over the 12 months to June 30, an 8.3% annual growth rate over five years. Catastrophe bond issuance hit US$24.9 billion, a 15% increase from the prior period and the highest 12-month total on record. Outstanding catastrophe bond volume rose 17% to US$63.4 billion.
The more consequential development for reinsurance professionals lies deeper in the data: a structural shift in where and how ILS capital is being deployed.
Catastrophe bonds are no longer functioning primarily as remote-tail protection. Issuances at expected loss levels of 5% or more accounted for 10.1% of total volume, up from 4.7% in the prior 12 months. Capital markets capacity is now competing at core and earnings layers, rather just at the top of the risk tower.
The industry loss segment has grown to roughly US$12 billion across 32 sponsoring entities. The year to June 2025 was the first in which industry loss issuance exceeded US$5 billion. In a softening market, buyers have placed capacity across tail, core, and earnings layers rather than concentrating at the remote end.
Indemnity triggers accounted for 81% of new issuances, up from 77% in the prior year. Industry index triggers fell to 17% of total new issuances.
The sidecar market reached an estimated US$23 billion in total capital outstanding by mid-2026, roughly 50% above year-end 2024 levels. That growth reflects earnings accumulated within existing vehicles and the entry of asset-intensive structures targeting casualty and whole-account portfolios.
These are not the property catastrophe sidecars that have defined the alternative capital market for two decades. Asset-intensive casualty sidecars pair underwriting expertise with third-party capital and asset management capabilities. They give reinsurers a capital-efficient way to support longer-duration portfolios and offer institutional investors access to insurance-linked returns outside traditional equity and fixed income markets.
The Hamilton Group's Ada Re casualty reinsurance sidecar is one of the more prominent examples from the period. Backed by Sixth Street, it is expected to write approximately US$300 million in ceded premium.
Chirag Shah, Gallagher Re's global head of casualty, has argued that these structures are opening up risk transfer for parts of insurers' portfolios that have not traditionally been reinsured, giving carriers a source of fee income and a potentially cheaper form of capital.
Asset managers are increasingly treating casualty sidecars as a foundation for insurance asset management. For reinsurers, this means that institutional capital is now competing for casualty proportional business that previously sat beyond the reach of ILS structures. That dynamic has already filtered through to pricing, with risk-adjusted rate reductions of 20% to 25% available on the strongest North American property catastrophe accounts at the renewals.
The 144A catastrophe bond market returned 12.5% over the period, based on the Aon Securities catastrophe bond total return index. Performance was supported by limited catastrophe loss severity, elevated collateral yields and stable secondary market pricing. Total coupon income on outstanding catastrophe bonds reached roughly US$7.1 billion.
Secondary market spreads for US hurricane-exposed bonds fell 16% over the period. Spreads now stand 51% below post-Hurricane Ian peaks from early 2023. The pace of decline has moderated: the 16% fall compares with 26% in the prior period.
A record 78 sponsoring entities accessed the catastrophe bond market, including 16 first-time issuers. Outstanding sponsoring entities totalled 119, a 12% increase from the prior period. Insurers accounted for 65% of new issuances by client type, followed by reinsurers at 17% and government entities at 16%.
New transactions during the period covered European flood, convective storm and windstorm exposures, and California wildfire. Parametric sovereign disaster relief bonds for the Kyrgyz Republic and Tajikistan were placed through the Asian Development Bank. North American perils still accounted for 90.1% of issuance by notional.
Pennay said the past 12 months had reinforced the catastrophe bond market's standing as a durable source of capacity. Aon expects continued demand for multi-year, diversified capital across a wider range of risks. The firm's constructive outlook sits alongside a note of caution from Swiss Re, which has warned that double-digit returns are a less likely outcome for market benchmarks in 2026 as spreads continue to compress.
