| By Gautam Naik Hedge fund Fermat Capital Management expects the market for catastrophe bonds to grow 20% this year, as a product based on disasters gains ground in a world increasingly shaped by extreme weather, population density and inflation. The market “has reached an inflection point,” John Seo, managing director and co-founder of Fermat, said in an interview. “The key thing is inflation,” he said, which is making it substantially more expensive in Europe and the US to rebuild property that’s been destroyed by natural catastrophes. Fermat’s growth prediction means the market for cat bonds, which are typically issued by insurers looking to offload extreme risk to capital markets, will reach roughly $60 billion by the end of 2025.  John Seo, second from right, at Fermat. Photographer: Joe Buglewicz The bonds have outperformed other high-yield markets in recent years, and even managed to sail through the turbulence triggered by US President Donald Trump’s tariff war. Against that backdrop, a product that was once the preserve of highly sophisticated investors is now luring a wider array of buyers. Fermat is among firms that have started offering access to cat bonds via UCITS funds, a product that opens the door to retail investors. And this year saw the introduction of the world’s first exchange-traded fund based on cat bonds. Investors in cat bonds stand to lose their capital if a predefined catastrophe occurs, but can reap huge rewards if it doesn’t. If payouts aren’t triggered by a natural catastrophe, the bonds are structured so that they do well when Treasury yields rise. Over the past year, they’ve returned about 14%, according to an index compiled by Swiss Re. “It’s been a pretty benign period for catastrophe bonds,” said Maria Dobrescu, a senior principal at Morningstar Inc. Market growth has come with a degree of realignment. Last month, Fermat was suddenly ejected from a two-decades-long agreement with GAM Holding AG to co-manage a $3 billion portfolio of cat bonds. The Zurich-based asset manager is instead teaming up with a unit of Swiss Re, a major issuer of cat bonds, to oversee the funds. Swiss Re has said it sees the development as an opportunity to target more innovation and product growth. “The market is growing not just in size, but in breadth and diversification in terms of sponsors and in the types of risk that is being transferred,” said Christopher Minter, head of Swiss Re Alternative Capital Partners. Seo says Swiss Re “is signaling a new level of seriousness and we welcome that,” adding that “the investor pie is growing so rapidly there’s enough business for everybody.” “Cat bonds are filling in the gap between the extra demand for reinsurance and the reduced capacity for reinsurance companies to absorb that risk,” Seo said. And the big driver behind that development is the rising price of rebuilding after catastrophe strikes. “Inflation has increased the underlying risk exposure by 50% in nominal dollars over the previous five years,” he said. Read the full story, including how Swiss Re plans to address shifting odds of disasters. Subscribe for even more cat bond and insurance news. | 
