S&P assign preliminary rating to Merna Re II catastrophe bond

Standard & Poor’s have assigned a preliminary rating to State Farms new Merna Re II Ltd. catastrophe bond transaction. The deal designed to hedge a portion of State Farms earthquake risks has received a ‘BB+’ rating.

Further details on the transaction have also emerged in S&P’s press release. The cat bond will cover State Farm for earthquake risks including fire following and sprinkler leakage. Territories to be covered are Alabama, Arkansas, Illinois, Indiana, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Ohio, Tennessee, and Wisconsin. Merna Re II will cover losses within those territories even if the earthquake epicentre occurred outside one of the named U.S. states. This perhaps suggests that State Farm may attempt to add other states to this deal or even issue another cat bond to cover other U.S. states where they have exposure. Merna Re II could be a case of them testing the markets appetite for these risks.

The preliminary volume of the transaction has been set at $250m which is expected to rise considerably before the deal completes. As we wrote a week ago, some are saying the deal could become a lot bigger, anything up to $700m is being discussed.