Merna Reinsurance Ltd.

Merna Reinsurance Ltd. transfers just over $1.18 billion of natural catastrophe risk from State Farm, the largest homeowners and auto insurer in the U.S., to investors, either as bonds or as loans.

The notes mature in three years and pay off for investors if State Farm’s aggregate catastrophe losses in the three-year period remain below a certain dollar amount.

This transaction effectively transfers a portion of State Farm’s risk of natural catastrophe losses in the U.S. and Canada including hurricane, earthquake, tornado, hail, winter storm and brush fire to the capital markets.

Thus, the rated securities are indemnity-based catastrophe bonds that provide cumulative, three-year aggregate excess of loss protection.

To facilitate the transaction, Merna Re provided fully collateralized excess of loss catastrophe reinsurance to Oglesby Reinsurance Ltd. (Oglesby Re) under the terms of two three-year retrocession agreements.

One agreement was for the bond notes, while a similar but separate agreement was for the term loans.

Oglesby Re is a State Farm-owned captive reinsurer in Bermuda. Oglesby Re then passed on the excess of loss catastrophe reinsurance to State Farm under the terms of the agreement.

The transaction broke down as follows, with the bond tranches first:

• Class A – $256 million
• Class B – $647.6 million
• Class C – $155 million

Three tranches of term loan notes were also issued:

• $94 million tranche A term loan
• $19 million tranche B term loan.
• $9 million tranche C term loan.