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Maybe the best investment environment in the history of ILS: Fermat’s Nelson Seo


Due to the range of influences and factors affecting catastrophe bonds and insurance-linked securities (ILS) this year, Nelson Seo, Co-Founder and Managing Director of Fermat Capital Management, believes this could be the best ILS investment environment ever.

nelson-seo-fermat-capital-managementCiting factors including spread widening, reinsurance pricing and hurricane Ian, Nelson Seo believes that market dynamics are on the side of investors, making this an excellent entry point to the cat bond and ILS asset class.

The spread widening seen through 2022 alone has set up “what we think could be the best investment environment in the history of the ILS market for 2023,” Seo said in an update to investors.

He went on to explain what has driven these market forces, saying that, “This spread widening is due to a large imbalance in the supply and demand of reinsurance which is expected to last at least well beyond 2023.”

Then in September, along came one of the most expensive hurricanes in history, Ian, which has caused impacts to the cat bond and ILS market, but also a further point of evidence that the market is robust, as issuance has continued and the market trades forwards as you’d expect.

Seo said that he believed hurricane Ian has, “pushed the dynamics even more in favour of ILS investors,” and he sees no signs of the attractive market opportunity diminishing any time soon.

He went on to explain that reinsurance brokers estimate a shortfall in capacity of anywhere between US $40bn and US $80bn, a gap that they do not expect will be bridged anytime soon.

These factors mean that in catastrophe bonds, “We are currently seeing spreads widen significantly across all perils in all layers, a hallmark of a true hard market,” Seo said.

On top of this, Seo and the team at Fermat Capital Management anticipate a very busy market pipeline, with high levels of demand for reinsurance in catastrophe bond and ILS formats.

As a result of which, “We believe the record high anticipated interest in catastrophe bond issuance for 2023 will create a rare situation where capacity deployment constraints are not the issue they have been in the past for fund subscribers,” Seo continued.

Which is a very important point, as historically the cat bond market has struggled to accommodate all the investor interest, in terms of inflows.

But the reinsurance supply/demand gap and rising cedent interest in cat bond coverage may give this market an opportunity to really expand in 2023, if all the stars align on issuance and capital inflows.

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