US primary insurance giant State Farm has again returned to the 144A catastrophe bond market for another slice of New Madrid earthquake reinsurance protection to sponsor its latest capital markets deal, a $350 million Merna Re II Ltd. (Series 2021-1) issuance.
As with all recent Merna Re cat bonds sponsored by State Farm, the issuance has been relatively privately placed with a select group of initial investors, although the resulting $350 million of notes are now more broadly available on the cat bond secondary market.
This is now the sixth year in succession where State Farm has chosen to source collateralized reinsurance capacity from insurance-linked securities (ILS) funds and investors on a privately marketed and placed basis.
From 2016 onwards State Farm has followed this club deal approach, electing to have its new cat bond transactions marketed more closely held, to a select group of catastrophe bond investors.
The use of catastrophe bonds for reinsurance protection at State Farm hasn’t changed though, with the Merna Re transactions continuing to provide the insurer with cover against losses from New Madrid zone earthquakes.
Merna Re II Ltd., a Bermuda domiciled special purpose insurer, has issued and sold $350 million of Class A notes to cat bond funds and ILS investors, with the proceeds used to collateralize an underlying reinsurance agreement between the issuer and the sponsor State Farm.
The notes will provide State Farm with earthquake reinsurance against losses from events in the New Madrid fault region on an indemnity trigger and we expect per-occurrence basis, with the protection running across a three-year term to early April 2024.
We understand from sources that the notes have an expected loss of around the 1.8% mark, which makes them riskier than the last two years of Merna Re earthquake cat bond notes.
The notes were priced to pay investors a coupon of roughly 3.75%, we understand.
This latest cat bond is State Farm’s twelfth issuance to use the Merna Re name and thirteenth cat bond transaction that we have covered from the carrier, dating back to its first in 2000.
State Farm has been a regular sponsor, having now returned to the catastrophe bond market each year since 2013, making it nine years in succession the insurer has sponsored a Merna Re cat bond deal.
State Farm’s private, or club based approach to the catastrophe bond market has helped it develop 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.
This club approach to marketing its cat bonds can also help provide important pricing indications, from across both traditional and ILS markets, helping a sponsor to identify the best source and cost-of-capital for its overall reinsurance program.