Significant investor interest. A wall of money, but slower moving: John Seo at Convergence


Speaking at the Convergence 2023 event in Bermuda yesterday, John Seo, Co-Founder & Managing Director at Fermat Capital Management, explained that there is significant investor interest in insurance-linked securities (ILS) right now, but when it comes to allocating, capital is slower moving these days.

Seo used the phrase “wall of money” to describe this investor interest in catastrophe bonds and ILS, but was careful to explain that the process to secure investor commitments has become a much lengthier one, while also highlighting that there is still money exiting ILS at the same time.

“On one hand, we’re seeing significant interest in putting more money in, that’s from existing investors, from new investors that have never invested before and from investors that did invest back in say, 2010 and 2011 but got out of the market in 2015 and 16. So that’s all positive,” Seo explained.

He went on to say that it’s nice to see that these investors have “a very deliberate approach to it”, with no knee-jerk deployments of large amounts of capital just because the ILS asset class is particularly attractive right now, driving a longer due-diligence process.

Seo said, “In the past, it’d be kind of fast to come, fast to go. It would stay a little bit longer than I would expect, but it was fast money.

“This is not fast money, but that’s the problem. The governance processes definitely have changed since say 10 years ago, so they have to kick it up the chain. There’s nothing wrong with that. But that chain of command is really distracted right now.

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“There are other large established asset classes that are showing interesting risk premiums and these large institutions can scale and move on that much more quickly than ours.

“So, they love what we do, but we’re like second on the agenda. We used to be like fourth or fifth. But just being second in this market, right now, means that the money comes in a lot slower than you think.

“I mean, you can see it on the call. They’re like, ‘cool, let’s do this we’re gonna throw $300 million in,’ then you think, so that’s gonna come in by November, or something like that. But it’s really February, March next year. So the money’s coming,” Seo told the audience.

He then moved on to highlight that while there is this significant investor interest, albeit slower moving, there is still the issue of capital leaving the ILS asset class occurring at the same time.

“One thing that’s come to light is that we’re still not done seeing an exit of money, which frankly surprised me a little bit,” Seo said.

Adding, “We’re still seeing some significant mandates that are downsizing or moving out in a lagged effect from their experience from 2017 to 2022. That I didn’t quite expect. That’s a negative.”

With capital flows still moving in both ways, Seo is still confident that more will enter than exit and the ILS market can still grow, it seems.

“There’s all these little technical things and they all add up, but it’s exciting in terms of, I can see the wall of money coming in, yes, I used the term wall of money. But it’s coming in slower than you might expect,” he said.

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He continued, “It’s good for the long-run, because it’s more thoughtful, the process. But then, disappointingly you’re still seeing these little billion or $2 billion chunks that are surprisingly just flowing out of the market and it’s something that they made up their mind to do a year ago, but they haven’t implemented until now. So that brings down the net inflow.”

Seo believes that the market can grow and supply the reinsurance capital that ceding companies need and believes that if the demand for protection is there, the capital inflows will follow to support that.

“Structurally, the support is there, for sure. On the ILS side, I’m talking about purely, if the sponsors of these deals, the insurance companies and reinsurance companies, are serious about turning the dial and allocating more of their protection buying to our side of the market long-term, we can definitely meet that with supply and normalised prices,” Seo explained.

But qualified it by saying, “It’s not going to happen overnight.”

Also read:

– ILS market size matters. We need to make it scalable: Convergence panel.

– The “most pronounced” risk-adjusted ILS returns: Tangency’s Stanton at Convergence.

– Bermuda remains world-leader for cat bonds, ILS and Convergence.

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