The average annual loss of a securitized tranche, shown as a percentage of principal and published at issuance.
The expected loss of a securitized tranche is the average annual loss the model projects on that tranche, expressed against its principal. It is the technical cost of the risk transferred and anchors every price discussion: the ratio of the spread paid to this expected loss gives the multiple, the only figure allowing notes on different perils to be compared. The problem it solves is commensurability between heterogeneous instruments: a Japanese earthquake note and a Florida hurricane note have nothing in common except that each can be related to its technical cost. The figure is produced by an independent modeling firm mandated at issuance, and its publication in the prospectus puts that firm's reputation behind it. Its sensitivity to assumptions stays high: moving from one model generation to the next has, on some perils, shifted published expected losses by thirty to fifty percent without any change in the underlying physical risk.
A series of cat bonds issued in 2026 carries expected losses from 0.38 to 3.9 percent, for spreads of 2.4 to 11.2 percent. The corresponding multiples run from 6.3 on the highest tranches to 2.9 on the lowest. A model revision published during the year lifts one note's expected loss by 27 percent, and its secondary market price falls 4.6 points with no event having occurred.
Expected loss ILS, Perte attendue annualisée, Annualized expected loss, EL