AM Best: Traditional Reinsurance Capital

Rating agency AM Best states that the build-up of traditional reinsurance capital is having a greater impact on market softening than the growth of insurance-linked securities (ILS). This comes despite record catastrophe bond issuance fueling strong ILS market expansion.

AM Best, in a new report, explains that while the ILS market's growth rate has exceeded that of traditional reinsurance dedicated capital, the absolute dollar value increase in the traditional market still surpasses ILS growth by a wide margin. The agency notes that traditional reinsurers can leverage their capital bases to make capacity go further, whereas most ILS capital matches risk dollar for dollar.

Capital Growth and Market Impact

AM Best and reinsurance broker Guy Carpenter estimated that third-party capital in reinsurance grew to $123 billion by the end of 2025 and is projected to reach around $130 billion by the end of 2026. "While the abundant capacity in the ILS market contributes to the overall softening of the market, the deployment of traditional reinsurance capacity is still more impactful," AM Best states. The agency warns that when traditional reinsurers become more competitive, it can accentuate the softening of pricing far more rapidly than the steady build-up of ILS capital.

Abundant traditional reinsurance and ILS capital drove softening at the key mid-year reinsurance renewals, making conditions increasingly buyer-friendly. "The supply of capital was estimated to have surpassed demand by over 25%, driving further declines in reinsurance pricing," added Matt Tuite, a director at AM Best.

Catastrophe Bonds and Returns

AM Best highlights exceptionally strong catastrophe bond issuance in the second quarter of 2026, matching Artemis's data point of US $11.3 billion in new issuance. "For perspective, the 2Q 2026 issuance was larger than total annual issuance for most of the history of the cat bond market," commented Wai Tang, a senior director at AM Best.

Spreads are now tighter and collateral yields slightly down, resulting in lower returns for cat bond and ILS investment strategies than seen in recent years. However, expected loss numbers for 144A Cat Bonds have increased compared to prior periods, which reflects higher exposure to loss. AM Best says that if losses rise, returns will compress further in 2026.

The decline in spreads alongside slightly higher average expected loss numbers across issued cat bonds has resulted in a decline in the cat bond multiple-at-market. Catastrophe loss levels in 2026 have remained manageable, causing no dent to capacity on either the traditional or capital markets side.

Outlook for Renewals

One key question for the future, critical for the January 2027 reinsurance renewals, is not whether buyer conditions remain favourable, but rather "to what extent further pricing adjustments may occur, assuming catastrophe loss activity remains relatively benign through the balance of 2026." AM Best concluded that the trajectory into the January 2027 renewals will depend heavily on whether the remainder of the North Atlantic hurricane season stays benign.