Britain’s ultimate backstop against flood-related losses is planning to rely more on the capi
tal markets, after its first ever catastrophe bond drew a lot of interest from specialist investors including hedge fund Fermat Capital Management.
Flood Re, a state-backed insurance program, now plans to “layer up” on cat bonds, said Chief Executive Officer Perry Thomas. The goal is to create a pipeline of bond
s that would follow a model used by Pool Re, the UK’s terrorism reinsurance program, he said.
Flood Re’s £140 million ($190 million) cat bond, sold last March, reflects the program’s
efforts to tap new sources of financing as the threat of flooding is forecast to become more pronounced. The UK government estimates that there are 6.3 milli
on properties across England that are currently in areas at risk of flooding, a figure that’s set to rise significantly in the years ahead.
Read more: Hedge Fund Fermat Says Surge in Cat-Bond Sales Is ‘Breathtaking’
Against that backdrop, Flood Re has been facing a “capacity issue,” Thomas said. “So you go out and find more capacity somewhere else” and “that’s where the cat bond became very useful,” he said in an interview in London.
As commercial insurers and reinsurers face rising costs amid increasingly destructive w
eather patterns, Flood Re has come up against new financing challenges. It’s now trying out a variety of options to meet the moment, Thomas said.
Flood Re has been “scouring the markets” for traditional forms of reinsurance and is now looking for other types of investors, Thomas said. The goal is to “g
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o and try and find different people to provide the money, and we’re seeing quite a lot of that.”
Flood Re was one of several new issuers tapping the market for cat bonds for the first time last year. John Seo, managing director and co-founder of Fermat, tol
d Bloomberg earlier this month that he’s aware of 16 new cat bond issuers in 2025. That’s as much as eight times the historical average, he said.
Of Flood Re’s bond, Seo said, “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.”
The need for cat bonds is linked to the fact that “there’s only a certain amount of capacity out there,” Thomas said. “If you are trying to hit a market that’s kind
of got lots of willing buyers, you pay one price. If you’ve then got to start scouring the market to
get that last bit of capacity, the price really, really escalates.”
Investors in cat bonds make money if a predefined disaster 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.