Swiss Re Insurance-Linked Fund Management

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Merna Re catastrophe bond notes re-affirmed


Merna Reinsurance Ltd. is an SPV (special purpose vehicle) set up in June 2007 for an alternative risk transfer deal for State Farm. The deal essentially transferred $4 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.

Fitch Ratings has recently re-affirmed the ratings of each of the tranches of notes, this usually happens at least once during a deals lifetime as a way to reassure investors that their investment in the notes is safe.

Given the current economic climate and the heavy catastrophe losses incurred this year you would imagine that State Farm would have been a little nervous prior to this reassessment of their deal.

However, the notes have been affirmed very positively! The affirmations consider the transaction’s stressed modeled loss statistics, the lack of catastrophe losses ceded into the structure to-date, the credit quality of the relevant counterparties and the credit quality of the invested assets held in the reinsurance trust. Modeled loss statistics are provided by an independent, third party modeling firm.

The ratings have been affirmed as follows:

  • $256,000,000 tranche A principal-at-risk variable rate notes due 2010 ‘AAA’;
  • $647,600,000 tranche B principal-at-risk variable rate notes due 2010 ‘AA+’;
  • $155,000,000 tranche C principal-at-risk variable rate notes due 2010 ‘A-‘;
  • $94,000,000 tranche A term loan, senior secured credit facility ‘AAA’;
  • $19,000,000 tranche B term loan, senior secured credit facility ‘AA+’;
  • $9,000,000 tranche C term loan, senior secured credit facility ‘A-‘.

Fitch does not anticipate losses from Hurrican Ike having any impact to these notes either.

A good endoresement for the catastrophe bond market and it’s security for investors!

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