U.S. primary insurer State Farm has been back in the catastrophe bond market in recent weeks, with a privately syndicated Merna Re Ltd. (Series 2018-1) cat bond transaction that successfully secured the firm a $300 million source of fully-collateralized U.S. earthquake reinsurance protection.
This Merna Re 2018-1 cat bond deal has been privately marketed to a select group of insurance-linked securities (ILS) funds and investors, using a syndicated approach but not marketed to the entire ILS investor community, hence details of the transaction are a little limited.
This $300 million cat bond took first-quarter 2018 catastrophe bond issuance to a new record of $4.24 billion, while the outstanding market reached a new all-time high at $32.83 billion, according to data from Artemis’ latest quarterly cat bond market report which you can download today here.
Merna Re Ltd. has issued a single $300 million tranche of Series 2018-1 Class A notes which have been sold privately to ILS investors in order to collateralise a reinsurance agreement between Merna Re and sponsor State Farm, we understand.
As with State Farm’s other recent Merna Re cat bonds, we assume the private syndication of these notes was in order to keep the insurers costs of issuance and reinsurance as low as possible, utilising a private club type deal.
This approach also enables State Farm to build deeper relationships with key ILS investor and ILS fund markets, especially those that participate in its traditional reinsurance renewal as well.
Additionally, the catastrophe bond issuance will have provided State Farm with vital pricing indications that can assist in its overall reinsurance program negotiations.
We’re told that the covered perils ceded to ILS investors through this Merna Re 2018 cat bond are U.S. earthquake risks, most likely from the New Madrid fault region in the mid-west where State Farm has a significant exposure. This would be the same covered peril as the insurers last few cat bond transactions.
This Merna Re 2018-1 cat bond will utilise an indemnity trigger, as State Farm’s cat bond coverage tends to provide the insurer with a source of indemnity reinsurance protection.
This Merna Re 2018-1 cat bond was issued and listed on the Bermuda Stock Exchange at the end of last week and has a three-year term, with the notes coming due for maturity at the 8th April 2021.
Other details on this cat bond transaction, such as expected loss, attachment point and pricing, are not known at this stage, due to the privately syndicated nature of the deal.
The fully collateralized reinsurance protection that State Farm benefits from with this new Merna Re cat bond deal will likely replace that provided by the recently matured $300 million Merna Re 2015-1 New Madrid quake transaction.
This is the insurers ninth Merna named cat bond and tenth deal in total that we have covered, dating back to the first in 2000.
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