Merna Re Ltd. (Series 2018-1)

U.S. insurer State Farm has returned to the catastrophe bond market with a Merna Re 2018-1 cat bond transaction that has been privately marketed to a select group of insurance-linked securities (ILS) funds and investors, we understand, hence details of the transaction itself remain limited.

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.

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 also participate in its traditional reinsurance renewal.

Additionally, the catastrophe bond issuance will provide 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 has a three-year term, with the notes coming due for maturity at the 8th April 2021.

The fully collateralized reinsurance protection that State Farm benefits from with this new Merna cat bond deal will likely replace the recently matured $300 million Merna Re 2015-1 New Madrid quake transaction.

Other facts on this transaction such as expected loss, attachment point and pricing are not known at this stage, due to the privately syndicated nature of the deal.