A recent report from investment manager Neuberger Berman has indicated that industry index catastrophe bonds have outperformed the broader cat bond market with respect to realised losses and mark-to-market performance, following the occurrences of both hurricanes Ian and Irma.
The report also analysed the cat bond space’s mark-to-market performance following significant cat events.
Over the full period examined, data in the investment manager’s report shows that industry index bonds have experienced significantly lower realised losses than what their respective modeled expected loss would imply.
Neuberger Berman emphasised that several features of industry index transactions, including cedant agnosticism, independent third‑party loss reporting and larger relative exposure to better-understood “peak” peril regions, could potentially explain why industry index transactions have outperformed indemnity deals when comparing realised losses to expected losses so far.
At the same time, data in the report showcases the solid performance of peak peril exposure versus “other” peril regions, and in the case of industry index transactions with peak peril region exposure, the realised loss ratio is only 0.1%, a remarkable 2.8% lower than the respective EL.
“Conversely, intrinsic indemnity transaction risks such as idiosyncratic factors could be what is driving a generally higher realized loss ratio, with hurricanes Harvey, Irma, Maria and Michael driving losses in 2017 and 2018. Nevertheless, when viewed across the full period, the loss ratio has remained below the EL, but substantial annual volatility persists across shorter periods,” Neuberger Berman explained.
Highlighting parametric triggers, the investment manager also outlined that parametric transactions can add value to portfolios through their fast and transparent payout mechanism, along with exposure to diversifying structures and peril regions.
However, Neuberger Berman cautions that parametric transactions can often come with their own modeling complexities, which need rigorous assessment.
Data from the report shows that parametric transactions have experienced the largest realised loss ratio over the full period (2002 – 2025), and much like industry index triggers, this is largely driven by catastrophe bonds with “other” peril region exposure.
“This underlines the importance of evaluating parametric transactions individually, with particular focus on whether anomalous “other” peril region exposure risk is being adequately captured by catastrophe models,” Neuberger Berman said.
Adding: “Although catastrophe models suggest that future events could ultimately bring the industry index realized loss ratio closer to the EL, the buffer observed over the past 24 years relative to indemnity is noteworthy and supports our general preference for industry index risk.”
While industry index transactions have managed to outperform other trigger types with respect to realised losses, Neuberger Berman’s report also examined how their mark-to-market performance compared following significant catastrophe events.
Additional data in the report indicates that the weighted average Swiss Re bid price for industry index and indemnity transactions during the two-year periods after Hurricanes Irma (2017) and Ian (2022) reveals that the prices for the industry index reverted to par at a significantly quicker pace than those for indemnity after Hurricane Ian.
Also, despite a more significant one-week downturn immediately following Irma, industry index prices recovered to par within 217 days post-event, whereas indemnity prices remained below par even two years later.
The investment manager also stressed that distinct risks associated with indemnity bonds, such as potentially poor cedant cat claims management, can often contribute towards extended periods of distressed pricing.
Furthermore, these issues are less pronounced in industry index transactions, where payouts are based on estimated losses across the entire insurance industry, as determined and reported on a scheduled basis by an independent claim reporting service.
“This approach diversifies away from dependence on the performance of any individual cedant,” Neuberger Berman added.
Concluding: “Collectively, these findings demonstrate that industry index cat bonds have outperformed the broader market with respect to realized losses and mark-to-market performance after Ian and Irma, reinforcing the assertions made in “Context Is Key: Deconstructing Expected Loss” on the advantages of industry index triggers.”
