Cat bond reset

Textbook case: a three-year bond attaches at 420 million with an expected loss of 1.30%. A year later, the sponsor's portfolio has grown and the model has been updated; with unchanged thresholds, expected loss would be 1.62%. The reset, an annual revision written into the contract, raises the attachment, here to 478 million, to bring it back to 1.30%. Attachment point, exhaustion point and sometimes index weights are recalculated each year by the calculation agent. Without it, a bond with thresholds frozen for three years would see its expected loss drift away from what the investor bought, as the sponsor's exposure grows and shifts and models change. The reset corrects by moving the thresholds, leaving the price alone. One variant moves the spread instead of the thresholds, within bounds set at issuance. That is what makes a multi-year bond workable against annual reinsurance: the sponsor locks in three years of capacity without locking in three years of exposure.