U.S. primary insurance carrier State Farm has returned to the capital markets to source fully collateralised reinsurance again, sponsoring a new $250 million privately placed and issued Merna Re II Ltd. (Series 2020-1) catastrophe bond transaction.
It’s the fifth year in a row that State Farm has accessed capacity from insurance-linked securities (ILS) funds and investors on a privately marketed and placed basis.
Prior to that, State Farm followed the same broadly syndicated approach of most cat bond sponsors, but from 2016 onwards has elected to have its new cat bond transactions marketed more closely, to a select group of catastrophe bond investors.
This new issuance from State Farm has been issued in the last few weeks during the second-quarter of 2020, we understand, although we cannot be sure of the precise date of settlement this time around.
The successful placement of the notes with ILS funds and investors has secured State Farm a new $250 million source of fully collateralised reinsurance protection, through this Merna Re II Ltd. (Series 2020-1) transaction.
As with other recent catastrophe bond transactions from State Farm, we assume that the covered peril is U.S. earthquake risk, although we cannot be certain if that is country-wide coverage or focused on a peak quake zone like the New Madrid fault, as some of the insurers previous cat bonds have been.
We do know that the transaction is slated for maturity in April 2023, suggesting the term of earthquake reinsurance coverage is going to be roughly three years for State Farm, but also perhaps that it was actually issued back around April and has just taken some weeks to come to our attention.
As a result, we’ve listed the transaction as an April issuance in our extensive catastrophe bond Deal Directory.
The $250 million of Series 2020-1 Class A notes issued by State Farm’s special purpose insurer Merna Re II Ltd. will have been sold to select ILS funds and investors and the proceeds used to fully collateralise an underlying reinsurance agreement between the SPI and the insurance carrier.
As said, we expect the reinsurance protection covers certain U.S. earthquake losses for State Farm, with the trigger expected to be an indemnity trigger.
We don’t have details of the attachment level or expected loss and pricing of these Merna Re II 2020-1 catastrophe bond notes. Should we source that information it will be added to our Deal Directory.
The private syndication of this latest $250 million Merna Re II catastrophe bond will have helped to keep State Farm’s costs of issuance and reinsurance as low as possible, by utilising a private club type deal, we believe.
State Farm has been a very regular sponsor of catastrophe bonds since the year 2000.
Its Merna Re cat bond series began in 2007, at first transferring multi-peril U.S. risks to the capital markets as the insurer expanded its reinsurance protection, but then switching to become an earthquake focused program of cat bond issues back in 2013.
State Farm’s more private approach to the catastrophe bond market in recent years has enabled it to build deeper relationships with key ILS investor and ILS fund markets, we understand, especially with those that also play a key role in its traditional reinsurance renewal.
The strategy provides important pricing indications, from both traditional and capital markets, that can help a sponsor in identifying the best source and cost-of-capital for its overall reinsurance program as well.
This is State Farm’s eleventh Merna Re named cat bond and the twelfth transaction that we have covered from the carrier, dating back to its first in 2000.