Cat bond market fundamentals are tremendous. Growth absolutely expected & sustainable: John Seo

The fundamentals underpinning recent and expected future levels of activity in the catastrophe bond market are tremendous according to John Seo of Fermat Capital Management LLC, given which the cat bond market’s growth is absolutely to be expected and absolutely viewed as sustainable, he has explained.

Speaking during a Fermat Capital Management hosted webinar yesterday, John Seo, Co-Founder and Managing Director of the specialist catastrophe bond and ILS investment firm gave some insights into how he thinks about the market’s recent success and also opined on some of the misnomers that are commonly held about cat bonds and insurance-linked securities (ILS).

Asked about what has been driving cat bond market activity levels and how investors should think about whether they are late to the party or not, Seo explained that it’s all down to the fundamentals, but that allocators should come with a long-term view of the asset class.

Seo replied to the question, “The consistent failing of investors, or people outside of the market, a failing of understanding, is that they see market growth like this, or spurts like this, as being episodic, being driven by some disruption in the market and so forth.

“Certainly, those types of things can be a catalyst to unleash growth. But it’s really the fundamentals underlying this asset class are tremendous.”

Continuing to explain, “There’s a tremendous amount of pressure for growth of this market and I think that the growth that we’re seeing recently is absolutely to be expected and is absolutely sustainable.

“Now another aspect, besides the fundamentals, there’s the build-up of catastrophe insurance risk in the US is just jaw dropping. Another thing that’s actually making it sustainable is that we’re seeing, finally, as you would expect after over 25 years of existence of this market, we’re seeing an institutional shift in attitude among insurance companies and reinsurance companies, even large corporates, are actually accepting cat bonds as kind of a normal way to manage catastrophe risk.

“So also, in part, the shift in attitude in terms of just treating this as not even just a useful tool, but how increasingly it’s being seen in many circles, is that you’re just not a 21st Century insurance company, or even corporate, if you aren’t using catastrophe bonds as yet another tool to manage your catastrophe risk.”

Seo summed up by adding, “So it’s just broader acceptance, strong fundamentals that are pushing supply of risk into the marketplace and then the other side of the coin, after over 25 years of existence, a really attractive track record, a better understanding among investors worldwide.

“You’re seeing greater acceptance from the investor side as well. It’s all just coming together.”

Seo then turned to the long-term view he believes is required in an asset class like catastrophe bonds.

He commented, “Unfortunately, there’s a bit of short-termism. So, as I said, a big failing of understanding is that this market is incorrectly seen as something that is more suitable to opportunism. So when you have record issuance, as we’re getting right now, you gear up for that, and then, frankly, after the record issuance kind of cools off, people think about exiting the market.

“So that creates a lot of short-termism, even among the managers. They’re figuring, it’s really, really good now, so let’s try to make as much money as possible here in the short term. Because later the investors, a lot of investors, are going to leave as the market cools off. I think that what that does is that it actually erodes quality of returns and things like that.

“We don’t do that actually. I mean, we’ve been around, or elements of my team have been around since there was only one cat bond. Now there’s 420 out there, and it’s very, very rapidly growing.

“We’ve been around since it was just one issuer, and now we’ve got 125 issuers half of which just came to market brand new in the last five years. But we’ve been around forever, we have a very long-term view.

“If you can approach this market that way, I think the benefits are tremendous.”