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Cat Bonds: Does an Active
Season Mean Larger Losses?
February, 2024
Time to read: 7 minutes
Authors
Yash Panjabi Andre Rzym Tarek Abou Zeid
Client Portfolio Management Analyst, Partner and Portfolio Manager, Partner and Senior Client Portfolio Manager,
Man AHL Man AHL Man AHL
www.man.com/maninstitute
The short answer: it depends.
Veterans of the cat bond market would argue yes, but 2023 was a notable exception. Other
instances in history even show that larger losses do not necessarily need to be precipitated
by an active season.
Executive Summary
Whether 2023 was an active insurance year is somewhat a matter of perspective. The
Atlantic hurricane season was the fourth most active on record, yet none were a particular
threat to the cat bond market, as the US did not suffer a single, large hurricane event.
The number of billion-dollar events was at record levels, yet the absence of single large
events meant that per occurrence deals, which trigger only if the losses from a single event
exceed a threshold, were largely safe. The 2005 and 2017 seasons, however, are prominent
examples of both high relative storm activity and correspondingly large losses on both an
annual aggregate and per occurrence basis1. Indeed, we may even find relatively inactive
seasons, such as 1992, where a single hurricane (Andrew) triggered substantial losses.
The 2023 Insurance Season
‘‘
The 2023 Atlantic hurricane season yielded 19 named storms (above the National Oceanic
and Atmospheric Administration (NOAA) 30-year average of 14) and tied for the fourth most
active since 1950 (Figure 1).
The 2023 Atlantic
Figure 1. 2023 tied in fourth place for the most named storms in a year since 1950
hurricane season
35
yielded 19 named
Cumulative Named Storms
Iota
storms and tied for 30
the fourth most 25
Tammy
active since 1950. 20
15
Alex
10
0
Apr May Jun Jul Aug Sep Oct Nov Dec Jan
Month
Other years 2023 2020 2015
‘‘
Source: NOAA/NHC, Man Group Database, as of 31 December 2023.
In spite of the number, only Hurricane Idalia was of note to the insurance industry, making
Insured losses, landfall in the Florida Big Bend near Keaton Beach on 30 August 2023 as a Category 3
hurricane with windspeeds of 125mph.2 Insured losses, estimated at $3-5 billion, were
estimated at
insufficient to worry the cat bond market yet big enough to sustain demand for reinsurance.
$3-5 billion, were
More interest, perhaps, came from the Eastern Pacific basin. Mexico has been a regular
insufficient to worry purchaser of insurance cover for earthquake and hurricane cover starting with the CAT-
the cat bond market Mex bonds in 2006, through to the International Bank for Reconstruction and Development
(IBRD) Sustainable Development Bonds in 2020. The latter are classic ‘Cat-in-a-Box’
yet big enough to
structures: a set of points are defined so as to partition land, sea, or coastline into
sustain demand for quadrilaterals. Within each ‘box’, a set of earthquake intensity/hurricane minimum central
reinsurance. pressure thresholds are defined. Depending upon which constraint is breached, these
parametric deals pay out some, or all, of the principal.
2 | Cat Bonds: Does an Active Season mean Larger Losses?
Pacific hurricane Lidia made landfall on 10 October 2023, having recently strengthened
to a Category 4 hurricane, with a minimum central pressure of 942mb.3 This was around
10mb higher than required to trigger the Class D notes. The possibility of a revision of the
pressure analysis at least raised the question as to whether a bond would be triggered.
Much clearer, though, was Hurricane Otis. Making landfall near Acapulco, Mexico with
165mph sustained winds and minimum central pressure of 923mb, the rapid intensification
of this hurricane (from a tropical storm to a Category 5 hurricane in 24 hours) was missed
by all major weather models: described by an RMS modeller as a “monumental” miss 4. Such
a failure may be an irritant to anyone trying to trade off forecasts, but it is far more serious
in terms of preparations and evacuations.
Figure 2. The rapid intensification of Hurricane Otis was not forecast by any of the
major weather models
‘‘
Even though the
US did not suffer
Source: NOAA/NHC. Tracks the path of Hurricane Otis.
a single, large
In any case, the central pressure is currently expected to trigger a 50% payout on this $125
hurricane event, the million note. Insured losses are estimated at $3-6 billion.5
number of billion- Even though the US did not suffer a single, large hurricane event, the number of billion-
dollar events in 2023 dollar events in 2023 was elevated. NOAA reports6 2023 as a record, consistent with Aon’s
observation7 that 2023 had the largest number of (global) billion-dollar events.
was elevated.
Figure 3. Not a single, large insurance event in 2023, but a record number of US billion-
dollar events
Year Number of billion-dollar events
2023* 23
2020 22
Ian 2021 20
2022
$116bn 2017 19
Harvey 2022 19
Katrina
2005 2017
$196bn $156bn
Maria Sandy
2017 2012
$112bn $86bn
2023 (to Sept) Cyclones Other
Source: NOAA/NCEI, as of 30 September 2023. Circle size indicative of losses associated with each event.
Cat Bonds: Does an Active Season mean Larger Losses? | 3
‘‘
It may seem somewhat counterintuitive that despite the record number of billion-dollar
events, the cat bond industry did not incur material losses. Looking under the hood at the
nature of these events reveals that the 2023 season was primarily comprised of lower-level
An important nuance tornadoes and linear wind scenarios, which cat bonds were broadly insulated from.
is that cat bonds An important nuance is that cat bonds coverage can be based on ‘annual aggregate’ or
coverage can be ‘per occurrence’ losses. In the case of the former, losses are aggregated throughout a year
over multiple events, whereas the latter only triggers if the loss of a single event exceeds
based on ‘annual
a threshold. The cat bond market held a greater proportion of per occurrence deals, which
aggregate’ or ‘per meant that given the absence of single, large events, losses were broadly contained.
occurrence’ losses. Previous hurricane seasons have shown, however, that this may not always be the case.
Indeed, it is possible to have a relatively inactive hurricane season, but still incur larger
losses. Take the 1992 hurricane season as an example, which had just six named storms, yet
the Category 5 Hurricane Andrew, which made landfall in southern US on two occasions,
generated approximately $27 billion in damages8, triggering per occurrence deals.
Conversely, the 2005 and 2017 hurricane seasons were examples of how higher activity
can translate into larger losses – logging as the two costliest years on record and among
the top 10 in terms of named storms. Circling back to our initial question, the correlation, or
causation rather, between the level of activity and portfolio losses is not necessarily a clear
cut one, with the idiosyncrasy stemming from the peril exposure and coverage type.
An additional distinction between per occurrence and annual aggregate bonds, particularly
pertinent during a high activity year like 2023, relates to deductibles. As alluded to
above, aggregate bonds cumulate losses over multiple events. If the cumulative total
exceeds a given amount, the bond will default and trigger a payout. Deductibles provide
some moderation to the computation of aggregate losses by excluding modest losses
from individual, smaller events that are within the deductible threshold. This means that
aggregate bonds with a low deductible are slightly more sensitive to a higher frequency of
smaller events.
‘‘
Parting Thoughts
High profile losses in recent years have led to improved investor discipline and demand for
higher return per unit of risk. Insurance losses in 2023 were sufficient to maintain discipline
High profile losses in
but insufficient to materially impact portfolios, meaning that returns were positive. And
recent years have led while looking at 2023 in isolation would lead us to the conclusion that higher activity
to improved investor does not necessarily precipitate wider losses in the cat bond market, this relationship
is dependent on the nature of bonds held. Per occurrence deals within cat bonds were
discipline and
largely safe in 2023, but the number of billion-dollar events meant that the risks for annual
demand for higher aggregate bonds particularly those with low deductibles, were skewed to the upside.
return per unit of risk. Looking at this coverage type in isolation, one could even conclude that higher activity in
fact meant higher losses.
4 | Cat Bonds: Does an Active Season mean Larger Losses?
Bibliography
1. www.foxweather.com/learn/most-expensive-hurricane-strikes-country-state
2. Source: www.rms.com/newsroom/press-releases/press-detail/2023-09-04/moodys-
rms-estimates-us3-billion-to-us5-billion-in-private-market-insured-losses-from-
major-hurricane-idalia#:~:text=Newark%2C%20CA%20%E2%80%93%20September%20
4%2C,estimate%20of%20US%243.5%20billion
3. Source: Man Group database and NOAA/NHC. Available here:
www.nhc.noaa.gov/archive/2023/ep15/ep152023.public_a.031.shtml
4. www.intelligentinsurer.com/insurance/major-hurricane-otis-in-mexico-a-monumental-
miss-by-weather-models-34027
5. Source: Man Group database and Insurance Journal. Available here:
www.insurancejournal.com/news/international/2023/11/15/748359.htm
6. www.ncei.noaa.gov/access/billions/#:~:text=In%202023%2C%20there%20were%20
28,and%201%20winter%20storm%20event
7. www.aon.com/en/insights/reports/climate-and-catastrophe-report
8. www.weather.gov/news/220822-hurricane-andrews#:~:text=Hurricane%20Andrew%20
is%20responsible%20for,Florida%20was%20caused%20by%20wind
Cat Bonds: Does an Active Season mean Larger Losses? | 5
Authors
Yash Panjabi
Client Portfolio Management Analyst, Man AHL
Yash Panjabi is a Client Portfolio Management Analyst at Man AHL, responsible for client
communication across Man AHL’s range of quantitative strategies. Prior to joining Man AHL
in 2023, Yash worked in investment consulting, advising large defined-benefit pension
schemes on strategic asset allocation. He previously completed internships in private equity
due diligence and equity research. Yash holds an MSc in Finance from the London School of
Economics and a BSc in Information Management from University College London.
Andre Rzym
Partner and Portfolio Manager, Man AHL
Andre Rzym is a partner and portfolio manager at Man AHL. He is responsible for identifying
alternative markets and developing pricing and systematic trading models for Man AHL.
This work has included interest rate swaps, credit default swaps, cash bonds, TBAs,
catastrophe bonds, cryptocurrencies and others. Before joining Man AHL in 2005, Andre
worked at JPMorgan, where he traded emerging-market interest rate and credit default
swaps. He has also worked at Greenwich Capital and SwissRe. Andre has a Triple First Class
MA in Natural Sciences from Cambridge University.
Tarek Abou Zeid
Partner and Senior Client Portfolio Manager, Man AHL
Tarek Abou Zeid is a Partner and Senior Client Portfolio Manager at Man AHL with
responsibility for investor engagement, new product development, and client
communication. Prior to joining Man AHL, Tarek was at Amundi/Pioneer, where he advised
clients on cross-asset portfolio construction and institutional solutions. Before that, Tarek
worked for Quant Capital researching and implementing systematic strategies. He holds a
degree in electrical engineering, majoring in signal processing and optical communication,
from RWTH Aachen University and has worked at Stanford University researching optical
modulation techniques.
Cat Bonds: Does an Active Season mean Larger Losses? | 6
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