ILS market hits $121bn as cat bond issuance breaks new records – Aon

The insurance-linked securities (ILS) market has reached its largest size to date, with outstanding alternative capital hitting $121bn by mid-2025, according to Aon’s latest annual report.

The “ILS Annual Report – September 2025” finds that catastrophe bond issuance surpassed $21.7bn in the 12 months to June 30, 2025 – the most active period in the market’s history.

Total outstanding cat bond volume rose by 19% year-on-year to a record $54bn, driven by higher issuance and reinvestment of maturing capital.

Richard Pennay, CEO of Aon Securities, said demand for ILS capacity continues to surge.

“Driven by higher building costs, evolving weather trends and the push to close the protection gap, cedents are increasingly seeking coverage beyond what is available in the traditional reinsurance market,” he said.

“With the uncorrelated nature of catastrophe bonds, and investors achieving double digit returns, the space continues to demonstrate its value and outpace growth in other areas of the insurance industry.”

Investor appetite, insurer demand

Cat bonds returned 14.1% for investors in the period, according to the Aon Securities Catastrophe Bond Total Return Index.

The strong performance came despite significant events including Hurricanes Beryl, Helene and Milton, as well as record wildfires in California. Most outstanding bonds were unaffected, underlining their remoteness to major loss activity.

The first half of 2025 alone saw 56 cat bond deals worth $17bn, matching the full-year issuance for 2024 in just six months.

Average deal size rose 12% to $302m. Issuer participation also deepened: insurers accounted for 58% of total issuance, reflecting growing demand for multi-year collateralised protection in the face of higher capital requirements under new modelling standards.

Regional concentration has intensified. 93% of issuance in the past year related to North American perils, with Florida-specific bonds increasing 46% to a record $5bn.

Florida now accounts for 16.6% of the total outstanding market. Citizens Property’s $1.525bn Everglades Re II 2025-1 issuance – the largest Florida hurricane bond to date – illustrated this trend.

Beyond traditional peak zones, innovation is also widening the scope of ILS.

Pool Re tapped the market with its third terrorism bond, Baltic PCC Ltd 2025-1, while Beazley issued a cyber cat bond through PoleStar Re.

Mapfre, Talanx and QBE also returned or debuted with new catastrophe bonds, highlighting the geographic and structural diversification of the sector.

Sidecars and ILS market expansion

Sidecar capital grew to $17bn, supported by strong margins and new product development. Aon’s report highlights the emergence of casualty sidecars as a breakthrough, after two decades of effort to attract meaningful alternative capital to longer-tail lines.

Ascot, for example, launched Wayfare Re in partnership with Antares Capital Management, following its property sidecar in 2024. These vehicles allow investors to pair casualty risk with private credit portfolios, aligning long-duration liabilities with steady yield opportunities.

For cedents, sidecars provide proportional capacity that helps manage claims frequency and underwriting volatility. For investors, they deliver equity-like returns while diversifying away from property catastrophe exposures.

Investor demand continued to outstrip supply in the secondary market. While spreads tightened through late 2024 and early 2025, they remained attractive relative to other fixed-income products. Aon’s index shows indemnity bonds tightening by around 20% and industry loss bonds by 30% during the period.

Macroeconomic pressures, including tariffs and higher rebuilding costs, had limited direct impact on ILS. Elevated collateral yields from the higher interest rate environment further boosted returns, with coupon income estimated at $7bn in the period.

The report also points to growing use of cat bonds beyond tail protection. Increasingly, cedents are deploying them as a strategic complement to traditional reinsurance across multiple layers of protection. Industry loss triggers are shifting to higher-risk layers, offering investors higher spreads and issuers more flexibility.

With cumulative returns of nearly 340% since 2005, Aon’s catastrophe bond index continues to outperform most fixed-income benchmarks. While the market remains concentrated in North American perils, the entrance of new sponsors and perils suggests a wider trajectory ahead.

Pennay said the long-term outlook is strong: “The space continues to demonstrate its value and pull investors into the market while outpacing growth in other areas of the insurance industry.”