Cat bond market could double to $70bn within five years: John Seo at SIFMA

The catastrophe bond market is seen as entering a period of particularly strong growth, with a potential doubling of the outstanding cat bond market to $70 billion within the next five years, according to Fermat Capital Management’s John Seo.

Speaking at the SIFMA ILS conference in Miami on Friday, John Seo, Co-Founder and Managing Director at Fermat Capital Management, LLC, explained that his firm has been raising capital and seeing inflows since right after hurricane Ian and has a significant target for asset growth in 2023.

Seo clearly expects asset growth across the broader insurance-linked securities (ILS) market as well, given his comments, but with the cat bond segment to expand fastest.

Explaining the post-Ian capital raising environment, Seo said, “When it came to investors, my clients, there was no uncertainty at all. I mean, we has clients wanting to put money in on October 7^th, so that’s barely a week after hurricane Ian made landfall, we really didn’t have any redemptions.

“It’s all inquiries about how much money to put in and when, it’s just requesting timing. I actually did okay the money in October.  I’ve been raising money ever since and it’s going extremely well.”

Later, Seo gave the audience a clear idea of the scale of the opportunity he sees in 2023.

“We set a goal to raise fresh capital of $2 billion in 2023, roughly half in the first-half of the year and we’re on track,” he explained.

He added that, “It’s not even that, that makes this market look so interesting to me. I think that on a deeper structural basis, I’ve not seen it be so positive.

“There’s a desire to issue more cat bonds than investors can absorb, so that just pushes the price higher.”

It calls for more capital as well and Seo feels the cat bond market is set for a sustained period of expansion.

Partly this is due to a reduction in reinsurance capital, partly due to a need to cover growing risks and inflating property costs.

Seo said that, “We’re seeing a real-time dramatic sea-change in the underlying risk capacity and structure of the market. Now that takes time for the system to react to that.

“At the highest level, insurance companies, reinsurance companies and even asset managers are looking at strategy, in a sense. It takes time, but it all the leads in the same direction, which is a tilt towards the capital market.”

Seo continued to explain that he believes, “This market could tip into a $70 billion market, no problem, in the next three to five years. Still not a giant number, but that’s a doubling of the market.

“So, let’s say $35 billion turns into $70 billion, and let’s say the non-cat bond market grows to $70 billion also. So, we’re talking about roughly a 50-50 mix.

“Everything grows right, but I think the cat bond side grows disproportionately.”

Asked where he sees the growth in cat bond assets coming from, Seo explained that it will come from a mix of investors, with different motives and levels of experience in investing in reinsurance or insurance-linked securities (ILS).

“I think that half of that increase is from existing investors and the other half is new investors,” he said.

Adding, “I know existing investors have the capacity to double it, but I admit that some of the core investors are at their full allocation, so they can’t do this alone. You know, if you go back to hurricane Katrina, existing investors on the spot doubled their allocation post-Katrina.

“I think that’s what we’re in for, so the increase will be 50-50 existing and new. The new ones though, are going to take a little time, so we have to go through an education process, say it takes another year to two years for that.”

A particularly bullish outlook on the market and the prospects for Seo’s firm, currently the largest manager of cat bond assets.