Merna Re V Ltd.

With the issuance of a single tranche of cat bond notes through Bermuda domiciled special purpose insurer Merna Re V Ltd., Artemis understands that State Farm is seeking at least $300m of fully-collateralized of reinsurance protection from capital market investors for the peril of U.S. earthquake risk.

The U.S. earthquake cover provided by the Merna Re V cat bond will be on a per-occurrence basis and the transaction will use an indemnity trigger based on State Farms ultimate net losses from qualifying earthquake events. State Farm is seeking three years of protection from the Merna Re V catastrophe bond, with it said to mature at the end of March 2017.

The earthquake cover is for Alabama, Arkansas, Illinois, Indiana, Kentucky, Louisiana, Michigan, Mississippi, Missouri, Ohio, Tennessee and Wisconsin, which are the U.S. states situated around the New Madrid earthquake fault. State Farm has protection for the same region from its Merna Re IV Ltd. which was issued in April 2013.

We’re told that the layer of coverage included in Merna Re V is very similar to the Merna Re IV cat bond, with the attachment point being the same, at $450m of ultimate net losses and the exhaustion point being at $1.45 billion. The transaction has an attachment probability of 0.56%, an exhaustion probability of 0.32% and an expected loss of 0.41%. These are all very close to the figures in last years State Farm cat bond deal.

The majority of the risk covered by Merna Re V will be personal lines homeowner property policies, we understand, with some commercial property included as well. The indemnity protection for claims arising from earthquakes in the covered area also includes fire following. Risk modelling for the transaction has been undertaken by RMS, Artemis understands.

The Merna Re V Ltd. cat bond notes are being marketed with price guidance of 2% to 2.5%, we’re told. Given the similarities between the expected loss of Merna Re V and last years Merna Re IV, as well as the identical attachment points it’s worth noting that Merna Re IV priced at 2.5%.

This suggests that if State Farm can secure the cover from Merna Re V at the lower end of the marketed range at 2% it could represent a 20% saving over the deal from the previous year. That is inline with the amount that U.S. property catastrophe rates on ILS have dropped over the last year.

Update 1:

Artemis understands that price guidance has now been lowered to the bottom of that range with the notes now offered with pricing of 2%.

That is a 20% decline in the coupon offered during the marketing of Merna Re V, from the top end of the original range or 11% from the mid-point, taking the pricing multiple down to approximately 4.88 times expected losses.

The Merna Re IV cat bond, which completed almost a year ago, priced at 2.5% (so 20% higher) for an almost identical level of risk. The multiple of coupon to expected loss for last years Merna Re IV was higher at 6.25 times, demonstrating the increased ability and appetite of cat bond investors to take on more risk for lower return due to their lower cost of capital.

Update 2:

At final pricing the coupon for the $300m of notes offered by Merna Re V Ltd. was fixed at the lowest end, at 2%.

This is now the lowest yielding pure quake cat bond in the markets history.