Merna Re IV Ltd. (Series 2013-1)

This is State Farm’s fourth catastrophe bond in the Merna Re series of deals. This latest Merna Re IV Ltd. cat bond will replace some of the cover provided by Merna Reinsurance II Ltd. which matures in April.

The cat bond is being issued through Bermuda domiciled special purpose insurer Merna Reinsurance IV Ltd. which was incorporated on the island on the 5th February.

Merna Reinsurance IV Ltd. will issue at least $250m of cat bond notes on behalf of sponsor State Farm, to provide a multi-year source of fully-collateralized reinsurance protection for some of its earthquake exposures. The cat bond will offer protection for earthquake risks in the following States; Alabama, Arkansas, Illinois, Indiana, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Ohio, Tennessee and Wisconsin, the same States as were covered by soon to mature Merna Reinsurance II Ltd. Given the list of covered States for this cat bond it’s clear that State Farm is seeking protection for New Madrid and surrounding areas earthquake risks.

Merna Re IV is structured to provide protection on a per-occurrence basis to State Farm and it will use an indemnity trigger based on the ultimate net losses of the sponsor. The transaction is due to have a three-year deal term, beginning at the start of April 2013 and running through until May 2016.

For losses to qualify they have to be caused by an earthquake which is USGS designated and the epicentre does not have to be within the covered area, rather the qualifying losses have to be within the covered States.

The attachment point for Merna Re IV is set at $450m of ultimate net loss to State Farm and it will cover a pro-rata share of losses, after a 10% retention by the sponsor, up to $1.45 billion. Merna Re IV’s initial probability of attachment is said to be 0.55% while the expected loss figure is 0.40%.

Pricing expectations suggest a coupon somewhere around the 2.75% mark above the return of the collateral investments. The low coupon reflects the remote nature of the risks involved in this cat bond.

Update:

Merna Re IV upsized by 20% to price with $300m of cat bond notes offered to investors.

The pricing finished at the lower end of the originally marketed range (which was 2.50% – 3.00%), pricing at 2.50%.