Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

State Farm sponsored Merna Re cat bond upgraded by Moody’s


It’s a long time since we’ve been able to write about an upgraded catastrophe bond, in fact the last time was when looked very different to this, possible as far back as 1999.

Merna Re was issued by State Farm in June 2007 to transfer a portion of their 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. The three year deal was one of the largest placed at $4b.

Now Moody’s Investors Service has upgraded the Tranche C notes and loans of the deal and affirmed the ratings of tranches A and B. The reason for the improved rating is that the total return swap counterparty now has improved collateral posting arrangements in place.

Merrill Lynch, the total return swap counterparty, will now have to true up market values to par on a weekly basis, previously that was only required as and when assets were liquidated. Moody’s also noted that the transaction is not yet at any risk of loss and that it will take at least two substantial catastrophe events to come close to hitting even tranche C.

This is extremely positive as it demonstrates that even existing transactions can improve their collateral arrangements by adopting some of the practices seen in more recent deals. By providing more transparent and regular updates on the state of the collateral arrangements Merrill Lynch has raised the attractiveness of these notes to investors and helped to stifle worries of correlation.

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