Fermat founders on notable catastrophe bond deals from 25 years in the ILS business

Fermat Capital Management, the specialist catastrophe bond and insurance-linked securities (ILS) investment manager, is celebrating its 25th birthday this year. The company has published a fantastic article listing 25 catastrophe bonds it feels were particularly notable from over its history, so we spoke with the co-founders to learn more.

John Seo and Nelson Seo, co-founders and Managing Directors of Fermat Capital Management provided some insights into why these 25 catastrophe bonds were particularly meaningful investments for them, or deemed important transactions in ILS market history.

You can see the full list of 25 notable cat bond deals over on the Fermat website.

Fermat Capital Management was founded by John and Nelson in 2001 and ended that year with over $30 million in assets under management.

Today, the company manages more than $11 billion of investments across catastrophe bonds and related insurance-linked securities and in its history, has traded over $60 billion in notional ILS in that time across roughly 17,500 primary and secondary market trades, while taking a lead investor position on more than 350 individual catastrophe bond deals.

That’s quite the track-record and after their 25 years in the ILS market John and Nelson seem as energised as ever for the asset class and its future role in delivering efficient capital to transfer and protect against peak catastrophic risks, while developing attractive opportunities for investors.

To begin our interview, we asked the Seo’s what made the 25 cat bond deals they selected particularly meaningful for Fermat?

John explained, “These are all deals that we believe contributed to the market’s growth story. They either marked the entry of an important future sponsor or peril, had an innovative feature or application, triggered payouts that proved the market’s worth, or generated important learnings for investors and sponsors alike to take forward and create the rapidly growing and increasingly relevant market that we have today.”

To which Nelson added, “Having been in this market since its early days, we’ve learned from each of these deals. If you’re in any market early and long enough, not only do you compound your returns for longer, you also compound your learning for longer. We believe compound learning is just as important as compound returns.”

Out of the 25 deals key learnings for Fermat included, “That our asset class and catastrophe bonds have a lot of potential important applications for the future, but good risk transfer standards have always been, and will continue to be, key,” Nelson further stated.

In terms of structure and the use-case for the risk transfer a catastrophe bond provided, the US Federal Emergency Management Agency’s entry into the market to source reinsurance for the National Flood Insurance Program (NFIP) is deemed a particularly notable one.

“The inaugural NFIP Floodsmart Re deal in 2018 is a particular favourite. We worked behind the scenes for years, lending our expertise to Congress who laid the groundwork for the Floodsmart Re deals to come to market. We are looking forward to seeing the NFIP and U.S. federal government back in the market in the future,” John told us.

The Fermat co-founders believe the market has developed a strong base, evidenced in the 25 cat bond deals they have highlighted.

From this base the opportunity is there to continue expanding the use-case for cat bonds and ILS structures, to broaden the asset class and make insurance risk transfer more efficient and available, supported by the capital markets.

“The ILS market is rapidly growing and broadening, now supporting multiple lines of re/insurance business and an expanding breadth of sponsors and perils,” Nelson said. “We believe the asset class has a lot more to do beyond re/insurance, and we look forward to seeing an even broader range of sponsors and applications in the years ahead: more corporates and sovereign sponsors, more deals addressing new pressing perils and critical risk management needs.”

John added that, “The basic blueprints for these future deals already exist, ready to be used and improved.”

Continuing to explain why these 25 landmark deals were selected, John said, “The list gives an insight into the deep foundation the market has built since its inception nearly three decades ago, a foundation based on the experience of committed sponsors and issuers, bold innovations, devastating catastrophes, and market loss events. It also reminds us that the asset class has, over time, proven itself to both sponsors and investors. This is timely, as the next 25 years will be very different to the last 25 years.”

Nelson further explained, “The future market will not only be hurricanes and earthquakes, but a wider range of risks that are increasingly becoming too big for balance sheets to bear alone. For this critical moment, when our market is going to be needed more than ever, this list of deals represents a market that is ready for its next chapter.”

Finally, we asked the Fermat Capital Management co-founders to reflect on their learnings and experienced over the 25 years since starting the firm.

Nelson told us, “It’s difficult to imagine that it’s been 25 years, but it does make sense when thinking about all the incredible changes and developments that have happened in the catastrophe bond market and our company since we started Fermat. We are grateful to our investors, our employees, and our business relationships – many of whom have been with us for the majority of our history – and look forward to the next 25 years.”

John added, “When Nelson and I founded Fermat 25 years ago, catastrophe bonds were still a young market. It has been both fascinating and gratifying to watch this market develop, participate in its expansion, and, of course, grow along with it. Today, the market includes more than 125 sponsors, something that would have been difficult to imagine in those early days.

“One of the things that has kept the work interesting is that it sits at the intersection of finance, insurance, science, nature, and technology, which means you never stop learning and the work remains intellectually stimulating. More than anything, I’m proud of the people and the institution we’ve built here at Fermat.”

You can access Fermat Capital Management’s article detailing the 25 landmark catastrophe bond deals over on the firm’s website.

Look out for our exclusive video interview with John Seo next week, in which we discuss Fermat’s 25th anniversary milestone and his views on catastrophe bond and insurance-linked securities market development over the years.