The market for catastrophe bonds is expanding at an unprecedented pace, with issuance levels being driven by a wave of first-time sellers and rising demand from insurers seeking to transfer risk to capital markets, according to a report by Bloomberg citing Fermat Capital Management.
John Seo, managing director and co-founder of the Connecticut-based specialist hedge fund, said the pace of new issuance is unlike anything he has seen before. He estimates that 16 first-time issuers entered the market in 2025 alone — as much as eight times the historical average — and expects total cat bond issuance to reach around $24bn this year, close to last year’s record.
Seo described the growth in supply as “pretty breathtaking”, adding that the current surge in issuance shows little sign of slowing.
A key driver has been inflation, which Seo estimates has increased property rebuilding costs by around 50% over the past five years. As a result, insurers and reinsurers are looking to offload more exposure to capital markets, boosting the role of alternative asset managers in providing protection against natural disasters.
Fermat said its net returns in 2025 broadly tracked the 11% gain posted by the Swiss Re Cat Bond Index. Investors in catastrophe bonds receive returns if predefined disaster events do not occur, while losses are triggered if they do. In recent years, performance has been strong, with cat bond returns matching those of the MSCI World Index over the past five years and outperforming US corporate bonds.
The asset class is also gaining traction with a broader investor base as inflation, urbanisation and climate change heighten awareness of catastrophe risks. Specialist managers now offer cat bonds to retail investors, and exchange-traded funds backed entirely by cat bonds have also emerged, though Seo expressed caution over the ETF structure, citing concerns around frictional costs.
At the same time, institutional interest continues to grow, with endowments, family offices and even life insurers allocating capital to the strategy. That influx has compressed yields, with spreads now around 6.5% over US Treasuries, down from roughly 11% in early 2023, though still above the long-term average of about 5%.
Based on Fermat’s issuance estimates, the overall cat bond market is on track to reach $70bn this year once maturities are taken into account.
Fermat now manages approximately $11bn in assets, up from $10.2bn a year ago, despite losing a $3bn portfolio management mandate from GAM Holding AG in 2025 after the firm opted to partner with Swiss Re instead. Seo said that transition has now been fully absorbed.
The firm’s flagship UCITS Cat Bond Fund has expanded rapidly, more than tripling in size over the past year to around $2.6bn in net asset value, while the Fermat Cat Bond Fund has grown by roughly 170% to $2.3bn, driven by a combination of inflows and performance.
Fermat has also been investing selectively in new issuance, including the first catastrophe bond from Flood Re, which was launched last year to cover flood-related losses in the UK.
