The co-founder of Fermat Capital Management says the market for catastrophe bonds is drawing in new issuers at a rate that’s unlike anything he’s seen before.
John Seo, managing director and co-founder of Connecticut-based Fermat — a hedge fund manager specialized in cat bonds — says he’s aware of 16 new issuers coming to market in 2025. That’s as much as eight times the historical average for first-time issuers, Seo said. He expects cat bond sales of about $24 billion this year, testing last year’s record.
The rise in first-time sellers has been “pretty breathtaking,” he said in an interview. And it looks like “the issuance surge we’re seeing is far from over.”
Read more: Catastrophe-Bond Risk Premia Drop to Rates Last Seen in 2022
A key driver is the rise in inflation, which Seo says has added about 50% to the cost of rebuilding property over the past half decade. It’s a development that’s led insurers and reinsurers to transfer as much risk as they can to capital markets, handing alternative investment managers like Fermat an ever larger role in providing a financial backstop when natural disasters strike.
Fermat told Bloomberg that its returns in 2025, net of fees, broadly matched the 11% increase in the Swiss Re Cat Bond Index last year.
Investors make money if a predefined catastrophe doesn’t occur, and lose money if it does. In recent years, bondholders have generally come out on top. Gains on catastrophe bonds have matched those of the MSCI World Index of global stocks over the past half decade, and trounced returns on US corporate bonds.
The bonds have also been making inroads into more mainstream financial markets thanks to a combination of inflation, urbanization and climate change. Asset managers specialized in the products now offer them to retail clients, while last year also saw the first ever exchange-traded funds built entirely on cat bonds, a development of which Seo says he’s skeptical.
Cat bond ETFs “are perhaps subject to too much in frictional costs to run efficiently,” he said.
Meanwhile, Seo says endowments, family offices and even life insurance companies are now joining the ranks of investors.
That influx of investor capital has pushed down cat bond yields to levels not seen since before Hurricane Ian hit Florida in 2022. Today, a cat bond investor gets roughly 6.5% above the US Treasury rate compared with about 11% in early 2023. But Seo notes that the current yield still beats the historical average of roughly 5% above the Treasury rate.
Based on Fermat’s estimate for new issuance, the market for cat bonds looks set to reach $70 billion this year, taking into account the expected expiry of old bonds.
Fermat now manages about $11 billion in assets, up from $10.2 billion a year ago. That growth comes even after it lost a $3 billion portfolio management deal with GAM Holding AG in April, after the Zurich-based asset manager agreed to team up with Swiss Re instead.
“That situation has now fully played out,” Seo said.
Fermat’s flagship UCITS Cat Bond Fund had a net asset value of about $2.6 billion, having more than tripled in size over the past year, according to data compiled by Bloomberg. The Fermat Cat Bond Fund has seen assets grow about 170% over the period to $2.3 billion, data obtained by Bloomberg show. The net asset value of the funds includes both performance and flows.
Fermat is now investing in some of the new cat bonds to come to market, Seo said.
Last year, the UK government-backed insurance industry-funded program known as Flood Re issued its first cat bond for flood-related losses. That’s as Britain faces increasingly devastating floods that are affecting an ever greater area of the country.
“We usually don’t comment on explicit investments, but this is such an important issue that I don’t mind saying that, yes, we absolutely did invest” in the Flood Re cat bond, said Seo.
Photograph: John Seo, managing director and co-founder of Fermat Capital Management; photo credit: Joe Buglewicz/Bloomberg
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