Cat bond returns to remain competitive in 2026 despite rising capital pressure: Fitch

Coming off an impressive year for the catastrophe bond market, which saw a number of new annual records set, investors are reinvesting their robust returns back into the insurance-linked securities (ILS) space, which according to Fitch Ratings, will further expand capital and pressure returns throughout 2026.

In a new report, Fitch said: “ILS capital reached another record high in 2025. Investor supply to the sector continues to grow with new capital entering the market, including from Alt. IMs seeking to enhance returns while benefiting from non-correlating risk.

“This increased capacity supporting new and upsized transactions and growing sponsor participation has resulted in spread tightening, reducing investor returns amid a softening alternative reinsurance market environment.”

Estimates from broker Aon show that alternative reinsurance capital, so that deployed through ILS as well as other related collateralized structures, reached a new high of $124 billion as of September 30th 2025.

“Catastrophe bonds issuance of USD24 billion in 2025 fueled this growth, surpassing the previous record issuance of USD17 billion in 2024. Total catastrophe bonds outstanding increased to USD59 billion at YE 2025, eclipsing the previous year’s record by over 25%,” Fitch said.

It’s important to note that total issuance across Rule 144A and private cat bond transactions tracked by Artemis reached over $25.6 billion in 2025, beating the previous record of just under $17.7 billion set a year earlier in 2024 by an impressive 45%.

For a detailed look at 2025 catastrophe bond market activity download our latest market report here.

The rating agency went on to explain that, even with pricing pressure from capital levels rising, it expects to see continued growth within alternative reinsurance capital throughout 2026.

The main reason being the fact catastrophe bonds and ILS are still a very attractive diversifying asset class, even with spreads lower. Forward-looking returns possible from ILS investments continue to compare favourably against other diversifying assets and fixed income alternatives.

According to Fitch, steady ILS growth will be supported by strong supply from investors, as loss activity has been limited.

While further momentum will also be fueled by new sponsors entering the space, as well as the expansion of non-peak perils, including wildfire, cyber and casualty risks.

“Catastrophe bonds achieved double-digit returns in 2025, with manageable losses from the California wildfires and the generally higher positioning of catastrophe bonds in cedent catastrophe reinsurance towers. Investors are reinvesting their robust returns back into the ILS market, which will expand capital and pressure returns. However, Fitch expects investor returns in 2026 to remain attractive relative to other asset classes,” Fitch added.