Fermat Capital has record year in 2023
Fermat Capital Management just had its best year in its more than two-decade history, after outsize bets on catastrophe bonds delivered record results, Bloomberg News has reported.
Fermat, which says it is the world's biggest cat bond investor, said its returns were “in line” with the 20% gain in the Swiss Re Global Cat Bond Performance Index.
Brett Houghton, a managing director at Fermat, which looks after about $10.8 billion of assets, told Bloomberg 2023 was a "unicorn year where you have great returns and equilibrium in the market”.
There was “strong investor interest and the need for the insurance market to issue more and more cat bonds,” he said.
Fermat has stakes in 80% of the roughly 280 securities outstanding in the market, Bloomberg said.
“The size of the market has increased, but it hasn’t increased enough to fill the need for potential events,” Houghton added.
Bloomberg noted that the cat bond market is looking at so-called secondary perils including severe convective storms, tornadoes and floods, but noted many investors remain wary because the data and models underpinning such risks aren’t yet robust enough.
“We find some secondary perils to be attractive and some not,” said Houghton. “They can help diversify your portfolio but they also come with uncertainty. There’s less R&D that goes into those models.”
Fermat is also investing in cyber bonds and expects to increase its exposure, he said.
“The exposure of cyber losses is potentially in the same magnitude range as a Category 4 or 5 hurricane hitting Miami,” he said. “We’ve identified that part of the market as a major area of growth over the next five to 10 years.”
Fermat was founded in 2001 by John Seo, a physicist by training, and his brother Nelson. Right from the start, the firm focused entirely on catastrophe bonds, then a niche and poorly understood form of alternative fixed-income investing. A key observation by Seo was that as more people moved to Florida, California and other places prone to natural catastrophes, the insurance industry would want to pass on a chunk of its growing risk to Wall Street.
Harnessing his background in physics, Seo then developed a more precise model than had previously existed to efficiently price the risk associated with extremely rare events, such as a devastating hurricane. Houghton, who says he’s known Seo for about 25 years, describes him as someone who possesses the requisite “enthusiasm” to enable him to “understand everything” there is to know about risk.
In September, Seo predicted there was "a wall of money" coming into cat bonds, although he noted investors were more heavily focused on due diligence.
Last year’s gains in the cat bond market were buoyed by the fact that the hurricane season was milder than in 2022, meaning bondholders had to cover fewer losses.
The final quarter of 2023 saw $5.6 billion in new cat bond issuance, including private deals, taking full-year deal volumes to an all-time high of $16.4 billion, according to Artemis. Those deals brought the total outstanding market to a record $45 billion, it estimates.
“And 2024 promises to be another interesting year for investors in terms of attractive returns,” Houghton said.
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