A recent report from Barclays Research indicated that current catastrophe bond market dynamics are perceived as being negative for both the reinsurance market and pricing cycle. Lower new cat bond spread multiples seen in Q4 so far indicate a market firing on all cylinders and a protection buying opportunity, but with ramifications for the traditional reinsurance side.
Analysts from Barclays note that cat bonds’ importance as a catastrophe and climate risk transfer and reinsurance tool continues to grow, supported by record issuance levels and wider adoption among insurers.
However, they also caution that this trend could heighten competition and potentially disintermediate traditional reinsurers.
As readers are aware, the catastrophe bond market is having a substantial year in 2025.
While the third-quarter of the year was relatively quiet within the space, we still saw more 144A cat bonds issued, which took the years total issuance of 144A notes to $18.1 billion by September 30th.
Now, with additional transactions settled in the fourth-quarter so far, the total for 144A cat bond issuance in 2025 has reached almost $19.1 billion at this time of writing and when including private cat bond deals issuance tracked by Artemis has reached over $19.7 billion.
As a reminder, you can analyse the catastrophe bond market using our charts and visualisations, which are kept up-to-date as every new transaction settles.
“Should 4Q25 see average issuance for the past five years (largely replacing maturities), issuance for the year should exceed US$20-23bn. Buyer demand remains very strong – anecdotal evidence from our Bermuda trip in May and Monte Carlo RVS in September suggests new issues are strongly oversubscribed, with deals typically upsized and priced towards the tighter end of spread guidance,” Barclays said.
With currently more than $3.1 billion of new 144A cat bond issuance in the market pipeline and yet to settle at this time and more possible before year-end, Q4 issuance will now be significantly higher than the scheduled maturities and we expect the annual total will ultimately near the top of Barclays’ projection or exceed it.
The analysts from Barclays added: “While the growth in the stock of reinsurance capital in 2023-25 has certainly been driven by strong returns that traditional reinsurers have generated in this period ($101bn of the US$119bn increase in dedicated capital), the pace of growth in cat bonds has been similar to that during the soft market of 2012-17 – an additional US$19bn have been added to the stock in 2023-1H25, with US$55bn of cat bonds outstanding as of end-2Q25.”
Barclays pointed out that this 54% increase has occurred only over two-and-a-half years, in comparison to the five-year expansion that the cat bond market saw in 2012-2017.
The firm regards the rapid expansion of the cat bond market as an “important contributor” to the reinsurance pricing cycle, with 2023 pricing being the peak, and 2025-26 showing clear signs of price correction.
Concurrently, Barclays also outlined how ILS fund returns significantly improved during the hard market.
“The inflows into the cat bond space have been driven by excellent returns in the past two-and-a-half years – since December 2022 insurance-linked strategies have outperformed the broader hedge fund group, lagging only the pure equity investing strategies. While most of the outperformance has been achieved in 2023, in 2024 and 2025 so far the performance of ILS funds has also been excellent – 13% in 2024, 8% in the first 9 months of 2025 (despite a challenging start to the year with California wildfires),” the firm noted.
It’s worth adding that as well as investor interest in insurance-linked securities, the other factor driving issuance is the growing acceptance of cat bonds by sponsors as they increasingly become a core and repeatable reinsurance or retrocession purchase.
Moreover, Barclays also acknowledged the proliferation of sidecars, a key trend that’s been emerging within the ILS space in recent years.
Analysts particularly highlighted how many sidecars that are sponsored by global reinsurers are now coming to market with a focus on casualty risk transfer, a risk that alternative capital markets had previously traditionally abstained from.
Most interesting to our readers perhaps, is where Barclays suggests that it is seeing clear evidence of the negative effect that ILS market competition is having on reinsurance pricing.
“Over 9M25 the cat bond multiple has compressed by 22% vs. 9M24 – investors now accept a spread of 7.2% over the same expected loss of 2.2%, compared to a 9.2% spread in 2024. This significantly exceeds the -8% reduction in the Guy Carpenter global prop cat rate on line index that we use as a proxy for broader reinsurance prices,” Barclays said.
Looking back at the soft market years of 2012-2017, Barclays noted that it observed a gradual shift of new issuance towards more frequent loss events, including what reinsurers may consider working layers with a high chance that part of or the entire layer may get hit by claims.
“In 2017, at the bottom of the soft market – 19% of all new ILS issuance had an expected loss of 4% or higher. In 2023, at the point of extreme risk aversion, this went down to 6% of all new ILS issuance, but in 1H25 we have once again observed an increase in risk appetite for new issuance. However, at 10% in 1H25, the share of riskiest cat bonds remains low,” Barclays noted.
Analysts also highlighted that on a quarterly basis, an increase is being seen in expected loss for new issuances, which signals that sponsors are able to place more risky layers that may be attaching lower down the property catastrophe towers. Although it is important to note that compensation for this has remained adequate through the first three-quarters of the year.
“However, the picture appears stable on a nine-month basis (with expected loss flat at 2.2% for 9M25 issuance, equivalent to 1:45 year loss occurrence), and anecdotally we still see stronger discipline on attachment points/terms & conditions for reinsurance programs. The cat bond market still appears reasonably far away from the soft market years when working layer coverage was available in the private ILS market, and average expected loss was as high as 3.5% (1:29 years)
“Still, we note that in the past changes in cat bond multiples have often been a leading indicator for broader reinsurance pricing – and we view the -21% change for 2025 issuance in that context,” Barclays concluded.
Of course, cat bonds get issued between the reinsurance renewal seasons, so they can certainly be a leading indicator and provide valuable insights for where pricing may be heading.
It’s worth highlighting that spread compression in new catastrophe bond issuance has accelerated in recent weeks of the fourth-quarter, with some deals now coming in meaningfully below comparable tranches offered only a couple of years ago.
The data currently indicates very strong cat bond market price execution that suggests a softening of more than 20% in two years, in some cases meaningfully higher than that. This will likely result in additional pressure on pricing of traditional reinsurance at the end of year renewals, it now seems.
But, while this indicates meaningful price softening could be ahead, the capital markets has seen spread compression across a wide-range of asset classes over the last year and investors are looking to stable return-drivers that can deliver over longer-horizons, something cat bonds have proven out over their history.
Cost-of-capital is still king in reinsurance, as long as you’re meeting it, while covering loss costs, expenses and a margin.
Currently the cat bond market is exhibiting that it believes its cost-of-capital is highly competitive, although naturally the liquidity in the market is also playing a significant role in price dynamics. It will be interesting to see how traditional reinsurers respond given their strong capitalisation as well.
Or, reinsurers could opt to focus their capacity deployment on layers where the catastrophe bond is less prevalent, while taking full advantage of the cost-efficient multi-year protection the capital markets can offer at the same time. There is a clear opportunity for protection buyers in the cat bond market at this time and while issuance might be exceeding maturities the levels of investor interest suggest it may prove persistent for a time.
Whether that’s a smarter choice, opting for longer-term sustainability of market dynamics over accelerated competition and rate declines, is still debatable for an industry always seeking to avoid disruption and disintermediation. We’ll have to wait and see how 1/1 plays out against a backdrop of such strong catastrophe bond market issuance conditions.
