Hedge fund Fermat Capital Management is forecasting a 20% expansion in the catastrophe bond (cat bond) market in 2025, as institutional and retail investors increasingly allocate to insurance-linked securities (ILS), according to a report by Bloomberg.
The report cites Fermat Co-Founder and Managing Director John Seo as saying that the forecast would take the cat bond market to approximately $60bn by year-end, driven by inflation, climate volatility, and population density.
Speaking with Bloomberg, Seo said that soaring reconstruction costs—particularly in the US and Europe—are pushing insurers to offload more tail-risk exposure to capital markets via securitised products like cat bonds.
Cat bonds, typically issued by insurers or reinsurers, allow investors to earn attractive yields in exchange for taking on extreme-event risk. If no qualifying catastrophe occurs, investors are rewarded with high returns, especially in rising-rate environments. If a trigger event hits, some or all principal can be lost. According to Swiss Re, cat bonds have returned around 14% over the past year, outperforming traditional high-yield credit.
The asset class is no longer the preserve of specialist allocators. Investment vehicles such as UCITS funds and, more recently, exchange-traded funds (ETFs) have opened the door to broader investor participation – including retail. According to Bloomberg Intelligence, retail investors now account for 30% of the UCITS cat bond market, up from 12% in 2015.
Fermat has been a key player in democratising access, launching multiple UCITS offerings. However, the firm recently experienced a strategic realignment when GAM Holding terminated a two-decade co-management partnership covering a $3bn cat bond portfolio, opting instead to team up with Swiss Re. The Swiss reinsurer now oversees GAM’s ILS strategies, including $3.7bn in cat bond assets.
Despite the reshuffle, Fermat saw $1.1bn in net inflows between March and April, while GAM recorded $1.2bn in redemptions, underscoring strong investor confidence in Fermat’s independent offering.
The shakeup underscores the increasing competition in the ILS space. Swiss Re has expanded its ILS platform to $6.9bn, while newly merged Twelve Securis manages $8.5bn, with $6bn allocated to cat bonds and the remainder in private ILS. Fermat remains a leader, overseeing $10bn in mostly cat bond strategies.
