Investor interest can survive pandemic cat bond loss: Seo, Fermat Capital

The World Bank’s pandemic catastrophe bond issuance looks increasingly likely to suffer a significant loss of investor principal due to being triggered by the ongoing Covid-19 coronavirus outbreak, but John Seo of Fermat doesn’t think that will dent investor appetite for the risk.

As we explained in this recent article, it looks increasingly like some $196 million of the pandemic catastrophe bonds and risk swaps issued by the IBRD to provide reinsurance capital to support the Pandemic Emergency Financing Facility (PEF) will pay out.

The final input to the trigger that is required is a positive growth rate in terms of cases affecting IBRD/IDA countries, which looks like it may be met over the coming weeks.

But the market-wide opinion is that these pandemic cat bonds have acted as advertised, with the parametric trigger conditions understood by the investors that bought into the deal at issuance.

John Seo, Co-Founder and Managing Director of specialist insurance and reinsurance linked securities manager Fermat Capital Management, explained recently that he doesn’t expect investor demand for pandemic risk to be dented significantly should the World Bank cat bonds payout.

Speaking to the Australian Financial Review, Seo explained that, while it was difficult to say for sure, “I expect investor interest to survive this loss. The modelling was good. It even predicted that the most likely point of origin for a coronavirus pandemic was China, though several other points of origin were of course possible.”

“Each pandemic is unique, as surely this one is, but pandemics themselves are not as infrequent as some might think. There’s an old rule of thumb that we expect to experience three pandemics on average each century – so at least once or twice in everyone’s lifetime.

“All of this is baked into the risk modelling. If after this event, the models need adjustments, those will occur, and investors will trade forward so long as there remains a need for some measure of protection against these potentially debilitating events.”

The loss will be a test of investor appetite for certain, but it is not expected to result in an inability to issue similar deals in future, with sufficient specialist ILS and cat bond fund managers in the market who can analyse and understand the risks associated with these transactions.

Seo also highlighted the importance of pandemic risk transfer and the landmark nature of this first pandemic catastrophe bond arrangement.

“They cover events that, we are now reminded, are explosive and consequential. The value of the coverage they provide is difficult to overstate. For sophisticated investors, they offer a positive expected return and compensation for a risk that is decidedly not compensated for in most traditional investments,” he explained.

You can read all about the World Bank issued pandemic catastrophe bonds in the Artemis Deal Directory.