U.S. primary insurer State Farm’s latest catastrophe bond has seemingly been successful and has upsized during the marketing phase and pricing has dropped to the lower end of the suggested range. Merna Re IV Ltd. sees sponsor State Farm seeking a new source of earthquake reinsurance protection from the capital markets via a cat bond issuance. It’s the insurers fourth cat bond issuance to date and focuses on U.S. earthquake risk around the New Madrid quake zone.
The transaction seeks to secure a multi-year source of fully collateralized reinsurance protection for some of State Farm’s earthquake exposure, on a per-occurrence using an indemnity trigger linked to the insurers ultimate net losses. The deal will run for a three-year term, providing protection up to April 2016.
Merna Re IV began marketing as a $250m single tranche of series 2013-1 cat bond notes. When the transaction priced yesterday the size had increased to $300m of notes, an increase of 20%. The coupon payment for the transaction was originally suggested in the range of 2.5% to 3.0%, but at pricing yesterday the deal achieved the lower end of that range at 2.5%.
Once again the successful growth in size and drop in pricing of the Merna Re IV cat bond shows the appetite for cat bond risks among investors in the capital markets right now. Merna Re IV is a low risk cat bond, with an initial expected loss of just 0.4% and an initial attachment probability of just 0.55% yet investors clearly seek the uncorrelated opportunity that cat bond investments can provide.
Merna Re IV has one of the lowest coupons seen in recent cat bond deals, due to the low risk nature of the covered peril, but a return of just 2.5% is still attractive enough to investors seeking to deploy recent capital inflows and ensure their cash is put to work. This deal clearly shows that cat bond investors are looking to put capital to work across the risk-range and lower risk deals are at the moment equally as attractive as higher risk cat bonds.
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