Last Updated: 09/24/2025

Insurance-linked securities (ILS) are products of the rapid development of financial innovation and the convergence of the insurance industry and the capital markets. The securitization model has been employed by insurers eager to transfer risk and use new sources of capital market funding. ILS, both from the life and property/casualty (P/C) sectors, hold great appeal for investors. 

In the second quarter of 2025, issuance reached a new quarterly record and the amount of catastrophe bonds outstanding rose materially, reflecting strong participation by repeat sponsors and first-time sponsors and steady demand from institutional investors for diversifying insurance risk.

While catastrophe bonds (cat bonds) remain the dominant type of outstanding ILS, there are also other non-cat bond ILS in existence, such as those based on mortality rates, longevity, and medical claim costs. 

Alongside natural catastrophe coverage, sponsors continued to bring transactions that address specialty exposures; for example, cyber risk transfer advanced through securities issued under Securities Act Rule 144A, while life and annuity risk transfer through mortality and longevity structures remained available to life insurers.

According to the Artemis Deal Directory, the second quarter of 2025 alone saw about 10.5 billion dollars of new risk issued across thirty-eight transactions and fifty-eight tranches, and the outstanding catastrophe bond market reached roughly 56.7 billion dollars as of June 30, 2025. 

In the first half of 2025, issuance totaled approximately 17.6 billion dollars, with new quarterly records set in both the first and the second quarter. May 2025 was the largest issuance month on record, and the average second-quarter transaction size reached about 276 million dollars, the highest level of the past decade. Market depth in securities issued under Securities Act Rule 144A remained evident in 2025, with a record thirty-six such property catastrophe transactions in the second quarter and only two private placements during the period. 

In 2025, larger repeat programs and notable first-time sponsors contributed to the increase in average size; transactions included a Florida Citizens Property Insurance Corporation catastrophe bond of about 1.525 billion dollars and a State Farm program totaling about 1.6 billion dollars across four series during May. Catastrophe Bonds 
Cat bonds are a segment of the ILS market. They are used by P/C insurers and reinsurers to transfer major risks on their books, such as for hurricanes, windstorms, and earthquakes, to capital market investors, reducing their overall reinsurance costs while freeing up capital to underwrite new insurance business. Cat bonds are structured so payment of interest or principal to the reporting insurance company depends on the occurrence of a catastrophe event of a defined magnitude or causes an aggregate insurance loss more than a stipulated amount. 

Recent issuance continued to concentrate on peak perils such as United States wind and earthquake and also incorporated severe convective storm coverage. Sponsors employed familiar trigger types and timed issuance to renewal cycles and the Atlantic hurricane season. Spreads eased from earlier highs while remaining attractive to sponsors and investors.

Pricing and risk mix in the second quarter of 2025 reflected broad investor appetite: approximately sixty two percent of quarterly issuance paid a spread between five and nine percent, about twenty one percent paid between one and five percent, and roughly seventeen percent paid above nine percent, while expected loss levels remained concentrated below two percent. 

The risk inherent in cat bonds is a key reason these securities are of relatively short duration, typically maturing in three to five years. Since the cat bond market's inception, 10 transactions have resulted in a loss of principal to investors out of the more than 300 transactions that have come to market in its nearly 20-year history. Of these 10 historical losses, six were the result of insured loss events and four were related to credit events in the vehicle's collateral due to the collapse of the firm responsible for guaranteeing the bond's collateral. Although it was once the most commonly used collateral structure, the collateral structure used in the deals that incurred credit-related losses, called total return swaps, is not used in any outstanding cat bond. Treasury money market funds are currently the most popular collateral solution, followed by similar investment-grade securities.

In 2025, collateral practices continued to rely on United States Treasury money-market funds and other investment-grade instruments, and new issuance materially exceeded maturities, supporting growth in the outstanding market.

Cat bonds remain a useful diversifying risk tool for investors' portfolios and a valuable risk transfer tool for sponsoring insurance companies. The spreads available in the high-yield markets highlight the attraction of the ILS market, which has been the beneficiary of large inflows from institutional investors. And as interest rates have risen, cat bonds haven't been deeply impacted, as they are generally issued as floating-rate securities.

Record issuance in the first half of 2025, continued absorption in the secondary market, and the entrance of multiple first-time sponsors indicate durable two-sided demand for catastrophe risk transfer through capital markets.

Insurers, in addition to being issuers of these securities, can and do invest in them on a limited basis. Insurance companies purchase these securities to diversify their portfolios. Typically, insurers are not expected to invest in a cat bond if they are already exposed to the peril in question in their primary business. 

Insurer investment remains selective and governed by portfolio diversification limits and correlation considerations relative to underwriting exposure.

Sidecars 
Another structure for transferring catastrophe risk to investors is the sidecar, which became very popular in the aftermath of Hurricane Katrina. Sidecars are deployed mainly by reinsurers following major catastrophes to add risk-bearing capacity in periods of increased market stress. Sidecars are special-purpose vehicles through which reinsurers cede premiums associated with a book of business to investors who place sufficient funds in the vehicle to ensure claims are paid if they arise. In contrast to cat bonds, which are structured as long-term instruments covering a broad array of perils and geographies, sidecars are tactical instruments of limited duration during a hard market.

By mid-2025, outstanding capital in collateralized reinsurance sidecars was estimated at about seventeen billion dollars, an increase of roughly seventy percent over the prior year, with growth concentrated in property catastrophe and expanding into casualty and specialty lines.

As severe natural catastrophes become more frequent due to changing climate conditions, insurers and reinsurers may boost their issuance of cat bonds and sidecars as additional protection from the risk of incurring solvency-threatening losses.

Sponsors increasingly combine catastrophe bonds, sidecars, and traditional reinsurance placements to align capacity with peak-peril volatility, as shown by sequential issuance records in 2025 around renewal periods and the Atlantic hurricane season.

As part of regulatory efforts to help manage catastrophe risk, the NAIC and state insurance regulators have developed a comprehensive national plan that incorporates new risk management techniques with a solid foundation of solvency and consumer protection inherent in state insurance regulation.

Regulatory work in 2025 included the principles-based bond project, effective January 1, 2025, which clarifies when a securitization is reported as a bond versus as an asset-backed security (Statement of Statutory Accounting Principles No. 26R and Statement of Statutory Accounting Principles No. 43R), and continued expansion of regulator training through the Catastrophe Risk Management Center of Excellence, including an updated catastrophe modeling primer.

Life Insurance Securitization 
Life insurance securitization is also a segment of the ILS market. Mortality and longevity risk securitizations fulfill a similar function for life insurers as cat bonds and sidecars do for P/C insurance and reinsurance companies; i.e., the transfer of risk to the capital markets.

Life insurers continued to access capital-markets solutions to transfer biometric risks and to finance embedded value and reserve needs, with such transactions evaluated within the statutory accounting framework and the investment analysis framework maintained by the National Association of Insurance Commissioners.

Extreme risks of increasing mortality rates due to natural catastrophes and pandemics could present a challenge to a life insurer's solvency. A jump in mortality rates would adversely affect the amount and timing of death benefits an insurer must pay. Longevity risk is the other side of mortality risk. A rise in longevity rates would increase cash outflows due to more annuity payments.

Apart from transferring mortality risk, life insurance companies have employed securitization techniques to: 1) monetize the embedded value of a particular block of business in order to fund acquisition or demutualization costs; and 2) fund the extra reserves required by Model Regulation XXX and the Valuation of Life Insurance Policies Model Regulation (#830). Often, a captive insurance company is at the center of Model Regulation XXX life securitization structures, and it is used as a repository for the funds that were available from the securitization. These securitizations continue to be assessed under the 2025 principles-based bond definition and related guidance to ensure consistent reporting and solvency analysis. 

The NAIC's Valuation of Securities (E) Task Force is tasked with providing regulatory leadership and expertise for the NAIC’s credit assessment process for insurer-owned securities, as well as produce insightful and actionable research and analysis regarding insurer investments.