Cat Bonds: Analysis of Recent Perils & Outlook for 2026

[00:04] Michael Srour:
Hello everyone, and welcome to the latest HANetf webinar.

My name is Michael Srour, and today we’re going to be looking at catastrophe bonds, particularly in the context of recent natural catastrophe events and the outlook for the remainder of 2026.

Catastrophe bonds, or cat bonds, are a specialist area of fixed income designed to provide exposure to insurance-linked risks such as natural catastrophes.

For investors, they can offer a differentiated return profile, with performance drivers that are less directly linked to traditional bond and equity markets.

Joining us today are Rick Pagnani, Managing Partner and CEO at King Ridge Capital Advisors, and Vijay Manghnani, Managing Partner, Chief Underwriting Officer and Chief Investment Officer.

Rick and Vijay previously worked together within PIMCO’s insurance-linked securities team before co-founding King Ridge Capital.

King Ridge is HANetf’s investment partner for the actively managed KRC Cat Bond UCITS ETF (CATB), Europe’s first UCITS ETF providing access to the catastrophe bond market.

Today we’ll cover recent natural catastrophe events, the 2026 Atlantic hurricane season, and how the portfolio is currently positioned.

Rick, welcome.

[02:22] Rick Pagnani:
Thank you, Michael, and thank you to everyone participating.

By way of background, I’ve been in the industry for more than 35 years.

My career began in traditional reinsurance underwriting at General Re. I subsequently became a Managing Director at Swiss Re before moving into asset management.

I later helped establish Mt. Logan Re, Everest Re’s third-party capital platform, and then ran PIMCO’s insurance-linked securities business. I was also CEO of its Bermuda reinsurance company, Newport Re.

Vijay and I worked together there managing insurance-linked securities portfolios.

We had always been interested in the ETF structure and, when we established King Ridge Capital, making the catastrophe bond market more accessible through ETFs became an important part of what we wanted to do.

I’ll hand over briefly to Vijay to introduce himself.

[03:48] Vijay Manghnani:
Thank you, Rick, and good afternoon, everybody.

I’m Chief Underwriting Officer and Chief Investment Officer at King Ridge Capital.

Rick and I worked together to establish PIMCO’s insurance-linked securities business. My role there included serving as Chief Risk Officer and Chief Actuary for the insurance-linked securities platform.

My career has been at the intersection of catastrophe risk, insurance and underwriting, including roles at AIG and RenaissanceRe.

I also hold a Ph.D. in Meteorology and am a Fellow of the Casualty Actuarial Society.

That combination of insurance, actuarial and meteorological expertise is particularly relevant to the way we assess catastrophe risk.

[04:42] Rick Pagnani:
We’ll begin with some recent natural catastrophe events.

We’ve seen earthquakes, as well as significant wildfires and other natural disasters.

These are tragic events with considerable consequences for local communities and economies.

But from an insurance perspective, many of them have been earnings events rather than capital events.

That distinction is important.

None of the recent events we’re discussing today has materially affected the catastrophe bond market.

Cat bonds are generally structured relatively far up an insurer’s risk-transfer programme. They tend to be designed to respond to more severe events after the insurer itself and, often, the traditional reinsurance market have absorbed significant losses.

That structure is an important source of resilience for the asset class.

[06:44] Michael Srour:
Before we go further, could you explain what an attachment point is for anyone who might be less familiar with catastrophe bonds?

Rick Pagnani:
Absolutely.

One way to think about it is through different layers of risk.

An insurance company typically retains the first layer of losses itself.

Above that, it may transfer another layer to traditional reinsurers such as Swiss Re or Munich Re.

The catastrophe bond market often comes in further up the structure, taking some of the more remote, severe risk.

For example, imagine an insurer retains the first $4–5 billion of losses and transfers the next few billion to reinsurers. A catastrophe bond might then provide coverage for losses above those levels.

The attachment point is essentially the threshold at which the catastrophe bond begins to be exposed to losses.

Michael Srour:
So if an event generates $2 billion of insured damage but a catastrophe bond attaches at $2.5 billion, the bond should not suffer a loss?

Rick Pagnani:
Broadly speaking, yes.

You also have to consider how much of the overall industry loss belongs to the particular insurer sponsoring the bond.

Imagine an industry event creates $3 billion of insured losses and the insurer has a 20% market share. Its share might be approximately $600 million.

If the relevant catastrophe bond only attaches once that insurer has suffered $3 billion of losses, the bond remains far away from being triggered.

Those smaller events can often be absorbed through the insurer’s earnings.

That is generally how these programmes are designed.

We had an earthquake in Japan in July with a magnitude of approximately 6.8.

There was strong shaking and a tsunami advisory, but the overall damage was substantially below the kind of level that would typically threaten the attachment points of the catastrophe bonds in the portfolio.

For example, we had exposure to two relevant bonds.

One had a franchise deductible of around $1.5 billion, while another had an industry-loss attachment point of around $50 billion.

Against estimated losses of only a few billion dollars across the industry, those bonds remained substantially out of the money.

That illustrates the importance of understanding where cat bonds sit within the overall insurance-loss structure.

An earthquake can be a significant event for local communities and insurers without necessarily becoming a significant event for catastrophe bond investors.

[10:09] Rick Pagnani:
Let’s turn to the wildfires, which have understandably received significant attention in Europe.

Vijay, perhaps you could explain what they mean for the catastrophe bond market.

Vijay Manghnani:
European wildfires have been significant, including particularly severe activity in Spain.

There has been considerable disruption to local populations and large areas affected by fire.

Wildfire risk has been on the insurance industry’s radar for some time, particularly because existing models have not always fully captured emerging trends.

But in terms of catastrophe bonds, the story is similar to the earthquakes we just discussed.

The consequences have primarily been felt by local communities and on insurers’ own balance sheets. The losses have not transferred materially into the catastrophe bond market.

We take a particularly cautious approach to wildfire risk.

Wildfire is one of the perils that we believe can be particularly sensitive to climate-related changes, so we do not take large dedicated exposures simply because the available premium looks attractive.

At the time of the webinar, only a small percentage of the portfolio’s overall risk exposure came from wildfire.

Much of that was incidental exposure embedded in bonds covering multiple different perils, rather than dedicated wildfire positions.

The catastrophe bond market itself has relatively limited exposure to European wildfire risk.

A number of wildfire catastrophe bonds have been issued, but most of the market historically focuses on US wildfire exposure.

European catastrophe bonds tend to be more heavily focused on risks such as European windstorm, earthquake and, in some cases, severe convective storms.

So despite the severity of the fires experienced in Europe, we hadn’t seen a meaningful impact on catastrophe bond valuations.

It’s something we watch very closely, but the direct exposure is currently limited.

[15:00] Vijay Manghnani:
Let’s move to the 2026 Atlantic hurricane season.

We are approaching the period when Atlantic hurricane activity typically peaks, and hurricane risk is one of the most important risks for the catastrophe bond market.

We therefore monitor seasonal forecasts very closely.

The broad consensus going into this season has been for below-normal Atlantic hurricane activity.

Forecasts were calling for fewer named storms and hurricanes than the long-term average, together with a below-average number of major hurricanes – those rated Category 3 or higher.

The season had also been relatively quiet up to the time of this discussion.

One of the major drivers behind that outlook is the emergence of El Niño in the Pacific.

El Niño tends to have a dampening effect on Atlantic hurricane activity.

Although it occurs in the ocean, El Niño also affects atmospheric circulation.

One consequence can be stronger wind shear over the Atlantic.

Wind shear refers to changes in wind speed or direction at different levels of the atmosphere.

Greater wind shear can make it more difficult for thunderstorms to organise into tropical storms and for tropical storms to intensify into hurricanes.

As El Niño strengthens, the atmospheric environment can therefore become less favourable for Atlantic hurricane formation.

Historically, El Niño-influenced years have tended to experience fewer Atlantic named storms.

However, there is a very important qualification.

It only takes one hurricane to cause a major loss.

A below-average season does not mean catastrophe risk disappears.

Hurricane Andrew in 1992 is the classic example.

That was an El Niño-influenced and relatively quiet hurricane season.

Andrew was the first named storm of the season and didn’t develop until late August.

But it rapidly intensified into a Category 5 hurricane before striking a densely populated part of South Florida.

At the time, it caused approximately $27 billion of economic damage and more than $16 billion of insured losses. Adjusted to today’s exposure levels, an equivalent event could be dramatically more expensive.

So although the seasonal odds may look more favourable, we don’t significantly lower our guard.

We continue to build the portfolio conservatively and diversify it so that a single major event should not dominate overall performance.

El Niño is only one variable.

We also monitor Atlantic sea-surface temperatures.

Warm ocean temperatures provide energy that can help hurricanes intensify and can therefore partly offset the suppressing effect of El Niño.

Another critical variable is storm track.

From an investor’s perspective, the direction in which hurricanes travel can matter considerably more than the absolute number that form.

You could theoretically have several Atlantic hurricanes that remain offshore and cause very limited insured damage.

Conversely, one storm taking the wrong track towards a highly populated area can create significant losses.

We therefore monitor atmospheric patterns such as the Bermuda High, which can influence whether storms move towards or away from the US coastline.

We also monitor factors such as Saharan dust.

Dry air originating in Africa can move across the Atlantic and suppress tropical cyclone formation.

So the overall hurricane outlook is based on a combination of factors rather than a single seasonal forecast.

[24:00] Rick Pagnani:
Vijay mentioned resilience earlier, and diversification is central to that.

The portfolio is highly diversified.

We try to balance some of the higher-paying risks, such as US southeast hurricane exposure, with catastrophe risks across different regions, different perils and different attachment points.

The objective is to make the portfolio resilient to any single event.

At the time of this webinar, the portfolio had approximately:

11.44% weighted-average coupon,
9.36% average yield,
a spread of approximately 6.1%,
and a modelled expected loss of approximately 2.85%.

Those are portfolio characteristics rather than expected investor returns.

One useful feature of catastrophe bonds is the depth of catastrophe modelling available for individual securities.

Every bond comes with detailed modelling information.

We can take that data and analyse how individual bonds interact within the portfolio, their marginal contribution to risk and how different catastrophe scenarios might affect overall performance.

From that perspective, I would argue that investors can potentially have more visibility into specific downside scenarios than they might get from many conventional high-yield securities.

At the time of the webinar, the portfolio held approximately 55 catastrophe bonds, with an average maturity of around 1.9 years.

The portfolio is diversified across risks including hurricanes, earthquakes, windstorms and a small amount of wildfire exposure, together with limited exposures to severe convective storm and winter storm.

We are not currently high-conviction investors in wildfire risk.

The third-party models are improving, but we still believe there are important uncertainties.

So while wildfire may appear within the portfolio, it represents only a small allocation.

We also diversify across different expected-loss bands and attachment points.

You don’t want the whole portfolio sitting at the same risk level.

Some catastrophe bonds attach at relatively remote levels and might, from a risk perspective, resemble investment-grade risk.

Others are somewhat closer to the underlying insurance losses and may resemble BB or B-rated risk in terms of their expected-loss profile.

Most of the market sits broadly around that higher-yielding part of the spectrum.

The objective is to combine these different exposures rather than concentrating the portfolio in one particular level of risk.

Another important feature of many catastrophe bonds is that their exposures are reset periodically, typically annually.

Imagine an insurer issues a bond based on the amount of property it currently insures in a particular region.

Over the following year, the insurer grows its business by 20% in that area.

The bond’s risk parameters can then be adjusted at the next reset.

That might mean increasing the attachment point or paying investors a wider spread to compensate for the additional risk.

This allows the market to respond to changing underlying exposures rather than leaving the risk profile fixed for the entire three- or four-year life of the bond.

The portfolio contains different types of bond triggers.

The largest category is indemnity bonds.

With an indemnity structure, the payout is linked to the sponsoring insurer’s actual losses.

We also like parametric bonds because of their transparency and ability to pay claims quickly.

A parametric bond might trigger based on an objectively measurable factor such as wind speed, earthquake magnitude or another physical parameter rather than waiting for an insurer’s final claims to be calculated.

There are also industry-loss triggers.

For example, the Japanese earthquake bond we discussed earlier had an industry-loss attachment point of around $50 billion.

That means industry-wide insured losses from the relevant event would have to exceed that threshold before the bond was exposed.

[31:00] Rick Pagnani:
Our investment process starts with our background in traditional insurance and reinsurance.

We think that experience is extremely important.

The catastrophe bond market is effectively an extension of the reinsurance market.

It is nuanced.

You need to understand how insurers operate, which sponsors have strong underwriting standards and which situations you might want to avoid.

We start with a top-down assessment of the market and the underlying insurers.

We then assess individual bonds.

There are roughly 350–360 catastrophe bonds in the broader market, while the portfolio currently contains around 55.

So there is clearly an active selection process taking place.

We’re not trying simply to own the market.

We’re trying to identify the securities we believe provide the strongest risk-adjusted return.

[35:00] Michael Srour:
That leads nicely into a question from the audience.

How does your expected loss compare with the broader market and peers? And what drives your approach towards potentially lower risk and stronger risk-adjusted returns?

Rick Pagnani:
The first differentiator is again our reinsurance background.

When investors select a catastrophe bond manager, we think it’s important to understand the manager’s experience with the underlying insurance risk.

We want to generate as much premium as possible for each unit of downside risk we accept.

We use a range of proprietary metrics to assess that.

Every position is also reviewed collaboratively by several members of the investment team.

I’ll let Vijay explain the modelling process in more detail.

[37:00] Vijay Manghnani:
At a fundamental level, investing in catastrophe bonds starts with understanding the science behind catastrophes.

Our team’s career experience has been centred on the intersection of catastrophe risk and insurance.

We’ve built, evaluated and worked with catastrophe models throughout our careers.

That helps us distinguish between risks that we believe are appropriately priced and those where we think the premium is inadequate.

The objective is not simply to find the highest-yielding bond.

If two bonds are available, we favour the one where we believe we’re being paid more premium for each unit of catastrophe risk we assume.

As a result, the portfolio might have a yield broadly comparable with other strategies while carrying a lower modelled level of underlying catastrophe risk.

We use established industry catastrophe models, but we don’t simply accept their outputs without adjustment.

We make our own assessments of factors such as:

• sea-surface temperatures and hurricane risk;
• moisture and vegetation conditions affecting wildfire;
• changes in property vulnerability;
• urbanisation;
• growth in the wildland-urban interface;
• inflation;
• and changes in insurers’ underlying portfolios.

We also scrutinise the data supplied by the sponsor.

Catastrophe bond offerings can contain enormous amounts of detailed exposure and modelling data.

We look at the age and quality of that data, whether inflation is adequately reflected, whether the insurer’s underlying book of business is growing or shrinking and whether those changes have been properly incorporated.

So you can think about our approach as bottom-up fundamental analysis of individual catastrophe bonds combined with top-down portfolio risk management.

At the portfolio level, we impose strict concentration limits.

We look at risk across multiple dimensions: geography, individual peril, individual sponsor and different catastrophe scenarios.

For example, US earthquake risk is separated from Japanese earthquake risk. Wildfire, flood and hurricane exposures are analysed independently across different regions.

We also monitor probable maximum loss, both for a single occurrence and for the aggregation of multiple events.

And importantly, we’re looking well into the tail of the distribution – including 99% and 99.6% risk measures.

The objective is to maximise the available yield while tightly controlling the potential impact of extreme events.

[42:00] Michael Srour:
You mentioned distinguishing between stronger and weaker counterparties or sponsors.

How do you actually make that distinction?

Vijay Manghnani:
It starts with financial stability.

A financially strong insurer is likely to behave very differently from a company under solvency pressure.

So we examine credit ratings, solvency measures and the overall financial position.

Then we compare insurers with their peers.

How have they performed historically when hurricanes or earthquakes have affected their portfolios?

Were their losses better or worse than you would have expected based on their market share?

That can tell you something about the quality of their underwriting.

We also examine operational maturity.

How robust are their claims systems?

What does their insurance policy wording look like?

How disciplined are their underwriting and risk-management processes?

We combine those factors into what we call a quality score.

The intention is to tilt the portfolio towards higher-quality sponsors and higher-quality issues.

[46:00] Michael Srour:
Liquidity is understandably another important consideration for investors.

Many traditional catastrophe bond funds hold some cash or short-term securities.

How do you manage liquidity within an ETF that offers daily dealing?

Vijay Manghnani:
Liquidity starts with portfolio construction.

Our objective is to build a broadly diversified portfolio with limited concentration risk and which should remain resilient to a single large catastrophe.

We also consider the relative liquidity of individual catastrophe bonds when deciding what to own.

And, of course, the portfolio holds cash.

Part of that is practical liquidity management, while part can also be tactical.

Holding some cash gives us dry powder to take advantage of attractive new issuance or other opportunities when they appear.

[48:00] Michael Srour:
The ETF also provides a daily NAV. How is that calculated?

Vijay Manghnani:
That’s an important point.

Many traditional catastrophe bond funds do not provide daily NAVs.

With this ETF, investors have daily valuation and transparent holdings.

The individual catastrophe bonds are independently marked by a third-party pricing provider, with those marks then provided to the fund’s custodian.

King Ridge is therefore not directly determining the daily NAV itself.

We think that independent valuation process and transparency are important features of the ETF structure.

[51:00] Michael Srour:
Another question investors often ask is what happens if there is a major catastrophe and they want to sell.

Could spreads increase substantially during an event?

Rick Pagnani:
The first thing I would emphasise is diversification.

It’s important to look beyond the headline event and understand exactly which parts of the portfolio are exposed.

Even within something like a Florida hurricane, catastrophe risk can differ significantly by location.

A storm affecting Miami may have a different impact from one affecting Tampa or another part of the coastline.

We build portfolios with that geographic detail in mind.

Historically, catastrophe bond markets can react quickly when an event occurs, particularly while investors are waiting for information about the potential insured losses.

As information becomes clearer, unaffected securities can reprice accordingly.

This is one reason detailed portfolio construction, diversification and liquidity management are so important.

The ETF structure also allows investors to trade shares through market makers rather than requiring every investor transaction to result directly in the immediate sale of the underlying catastrophe bonds.

Michael Srour:
Thank you, Rick and Vijay.

We’ve covered a lot today – recent catastrophe events, wildfire risk, the outlook for the Atlantic hurricane season, how catastrophe bonds are structured and how King Ridge approaches underwriting, portfolio construction and liquidity.

For anyone who would like to learn more about the KRC Cat Bond UCITS ETF, further information is available through HANetf.

Thank you to everyone who joined us and submitted questions, and thank you again to Rick and Vijay for the discussion.