U.S. primary insurance giant State Farm has once again privately syndicated and quietly issued its latest catastrophe bond, a $300 million Merna Re II Ltd. (Series 2019-1) securing the firm an expanded source of collateralized U.S. earthquake reinsurance protection.
State Farm has been regularly visiting the catastrophe bond market since the year 2000. Its Merna Re series of cat bond deals began in 2007 though, at first transferring multi-peril risks to the capital markets as the insurer expanded its reinsurance protection, but then switching to a largely earthquake focused program of cat bond issues.
This is now the fourth year in a row that State Farm has privately syndicated and placed a $300 million U.S. quake catastrophe bond at the end of March.
This deal will have been privately marketed to a select group of insurance-linked securities (ILS) funds and investors, using a syndicated approach but not marketed to the entire ILS investor community, hence details of the transaction are somewhat limited.
For its latest cat bond State Farm has registered a new special purpose insurer in Bermuda, named Merna Re II Ltd.
Merna Re II Ltd. has issued a single tranche featuring $300 million of Series 2019-1 Class A notes which have been sold to ILS investors, with the funds raised used to collateralize a trust to support a reinsurance agreement between Merna Re II and State Farm.
We’re told the reinsurance coverage this cat bond provides State Farm is for U.S. earthquake exposures, however we do not know if this is country-wide, or just the New Madrid zone, as many of the previous Merna Re cat bonds have been focused on.
The reinsurance coverage that State Farm benefits from with this Merna Re II cat bond will run for a three-year term, we understand, with maturity due April 7th 2022.
We assume the private syndication of these Merna Re II notes was so as to keep State Farm’s costs of issuance and reinsurance as low as possible, by utilising a private club type deal.
This approach has allowed State Farm to build deeper relationships with key ILS investor and ILS fund markets, especially those that participate in its traditional reinsurance renewal as well.
The strategy also provides vital pricing indications, that can assist a sponsor in identifying the best source and cost-of-capital for its overall reinsurance program as well.
This $300 million Merna Re II 2019-1 cat bond will utilise an indemnity trigger, as State Farm’s cat bond coverage tends to provide the insurer with a source of indemnity based reinsurance protection.
The fully collateralized reinsurance protection that State Farm benefits from with this new Merna Re II 2019 cat bond deal will serve to replace that provided by the soon to mature $300 million Merna Re 2016-1 transaction.
This is State Farm’s tenth Merna named cat bond and eleventh transaction that we have covered, dating back to its first in 2000.
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