For catastrophe bond transaction sizes to increase during the time they are marketed to investors is not uncommon. In fact it is now more common for a cat bond to increase in size than for it to stay the same, it does happen but not very frequently. The size of a cat bond is in most cases now determined by investor appetite for the transaction, with the majority of deals being pitched at a minimum size that the sponsor would like to achieve.
Because of this trend towards testing the market by launching a cat bond small but with ambitions to grow it by completion, if the price and terms are right for the sponsor of course, we see the majority of deals upsize. The extent that a transaction can increase in size is driven by the sponsors coverage needs, they won’t take on more cover than they require and hence some recent cat bonds have been more than twice oversubscribed with some investors being left disappointed when the transaction size is capped.
In a similar vein to the last few years, 2013 has so far seen a healthy trend of upsizing of cat bonds emerge, with every deal so far increasing in size, except for Aetna’s Vitality Re IV Ltd (worth noting that none of Aetna’s Vitality bonds have upsized) and Florida Citizens Everglades Re Ltd. (Series 2013-1) who only ever targeted $250m.
We’re only including cat bonds which have either fully completed or have reached pricing and are about to complete here, so not including the two most recent launches (Bosphorus 1 Re Ltd. and Pelican Re Ltd. (Series 2013-1)) which haven’t yet had a chance to upsize. In these numbers we are including the following transactions; Skyline Re Ltd. (Series 2013-1), Vitality Re IV Ltd. (Series 2013-1), Caelus Re 2013 Ltd. (Series 2013-1), Everglades Re Ltd. (Series 2013-1), Merna Re IV Ltd. (Series 2013-1), Caelus Re 2013 Ltd. (Series 2013-2) and Tar Heel Re Ltd. (Series 2013-1).
Those seven transactions launched with a combined planned issuance volume of $1.325 billion. By the time they all reached pricing the combined actual issuance volume had grown by 40% to $1.851 billion, a very healthy increase. The upsizing could have been much greater had Florida Citizens had aspirations to grow its cat bond coverage again in 2013, the deal was heavily oversubscribed we understand.
The cat bond which has upsized the most so far in 2013 is the, completing this week, Tar Heel Re cat bond. This grew by a massive 150% from $200m to $500m and saw its pricing drop as well.
However, the 40% average upsizing seen so far in 2013 is actually lower than the average increase in deal volume seen in each of the last three years. The graphic below from Munich Re’s latest ILS market report shows that in 2012 issuance volume upsized by 57% on average, while in 2011 it jumped by a huge 66% on average and in 2010 by 44%.
There is still plenty of time left for 2013 issuance to catch up with those percentages and we expect the trend of cat bond deal size increases to continue. Given the competitive nature of cat bond pricing right now it’s likely that the other two deals in the market could also see an increase in size before they close as investors have a strong desire to deploy capital into cat bonds still.
You should also read our article on how pricing of cat bond coupons changed as deals came to market in 2013 so far: Catastrophe bond coupons drop by average 16% during marketing in 2013.