Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

ESG credentials of ILS attracting new investors & issuers: John Seo, Fermat


The environmental, social and governance (ESG) credentials of the insurance-linked securities (ILS) market have become a key driver for issuance activity, according to John Seo of Fermat Capital Management, LLC.

John Seo, Fermat Capital ManagementThe insurance-linked securities (ILS) asset class has experienced positive momentum and growth over the last year, with catastrophe bonds one area that has experienced particularly positive inflows from investors.

While this can be attributed in part to the reinsurance needs of ceding companies, alongside continued strong appetite for non-correlating investments among capital market investors, John Seo, Co-Founder and Managing Director of ILS and catastrophe bond focused investment manager, Fermat Capital, believes that increasingly, ESG is playing a role in market activity.

ESG has been a particularly hot topic in ILS markets and among investors looking at the range of ILS assets, from catastrophe bonds to collateralized reinsurance, for more than two years now.

ILS and catastrophe bonds are seen as having inherent ESG qualities, given they are vehicles for provision of disaster risk and recovery financing, protect society against environmental impacts of weather and natural disaster events, and come from a marketplace with strong governance already in-place.

As institutional investors increasingly turn to ESG relevant asset classes, ILS and catastrophe bonds are taking a share of the ESG allocator inflows.

While those ESG allocators have huge amounts of capital to deploy, the somewhat limited size of the cat bond market may be particularly affected by attention stimulated by ESG awareness of the asset class, it seems.

Speaking to investors about recent activity in the catastrophe bond market in 2021, Seo of Fermat explained, “The biggest development in this last quarter was record growth in our market.

“We had an unprecedented number of new and existing issuers coming to market issuing bonds. And of course, the reception was commensurately strong as well, among investors.”

Seo said that ESG has now become one of the drivers the ILS market should consider, when analysing what drives it to new issuance heights.

“We believe that a lot of what was driving this, besides the overall attractive market conditions for investors, was the ESG credentials of the market, which are bringing in new investors but also new issuers in our marketplace.”

In addition, Seo recognised some of the longer-standing positive attributes of catastrophe bonds, in how their collateral investment yield is also a good buffer against outside market conditions.

He explained that at this time, “The floating rate nature of catastrophe bonds, too, seems to be appealing to those investors who are seeking to immunise their portfolios against any unexpected inflation moves.”

Drivers aside, the record levels of catastrophe bond issuance seen in recent months has also been positive for portfolio construction, Seo said.

“In terms of positioning, we feel very good because the record issuance that we’ve just gone through really gave us extra room to manoeuvre, to pick and choose and set the portfolio as desired, going into this hurricane season,” Seo commented.

As one of the largest asset managers in catastrophe bonds, it’s intriguing to hear that ESG may already be having this level of effect, in terms of investor inflows and appetite.

With very few cat bonds explicitly issued with an ESG report so far, this bodes well for the market as its ESG adoption matures and more information is supplied to managers and investors on the relevant qualities of individual transactions and ILS investment opportunities.

ESG investing is a growing focus for the insurance-linked securities (ILS) market. Read more of our insights on this topic here.

Register today for ILS Asia 2023, our next insurance-linked securities (ILS) market conference. Held in Singapore, July 13th, 2023.

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