U.S. primary insurer and regular insurance-linked securities sponsor State Farm is returning to the catastrophe bond market with its fifth Merna Re branded issuance, a $300m Merna Re V Ltd. U.S. earthquake cat bond.
As soon as Artemis arrived in New York for the SIFMA Insurance and Risk Linked Securities conference this week, a first rumour heard was that one of the large U.S. primary insurers, a repeat sponsors of catastrophe bonds, would be launching a deal timed to coincide with the insurance linked securities community being in town.
Artemis’ sources proved correct and we understand that the Merna Re V Ltd. catastrophe bond from State Farm Fire and Casualty Company has been launched to the market today by the sole structuring agent and bookrunner Aon Benfield Securities.
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 25% 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.