Further demonstrating how attractive the catastrophe bond market is for sponsors right now, US primary insurance giant State Farm has returned to the 144A catastrophe bond market for its second issuance in just two months, completing a $300 million Merna Re II Ltd. (Series 2021-2) deal in recent days.
As ever, with the more recent Merna Re catastrophe bonds from State Farm, the transaction has been marketed to a more limited group of cat bond funds and investors, in a relatively private, club-like process, we understand.
The underlying perils are likely to be U.S. earthquake related again, we believe, with this latest Merna Re cat bond possibly providing State Farm with New Madrid earthquake reinsurance protection, as most of its deals have done.
It could be a broader US quake deal though, as State Farm has also sponsored some cat bonds that included quake risks from other regions of the United States.
State Farm has typically been an annual sponsor of a single catastrophe bond since 2013, prior to which it did once sponsor two Merna Re’s in 2010.
In April, the insurer returned with a $350 million New Madrid earthquake cat bond deal.
So 2021 is the first year since that, when two Merna Re earthquake cat bonds have come to market. A clear sign of the attractive issuance conditions for cat bonds, as well as State Farm’s desire to capitalise on institutional appetite for catastrophe risks, allowing it to ramp up its fully collateralized reinsurance protection.
Despite being relatively privately marketed, the $300 million of Merna Re II 2021-2 notes will now be more broadly available in the cat bond secondary market.
Since 2016, State Farm has taken a club-deal approach to catastrophe bonds, with each of its new cat bond transactions since being marketed more closely held, to a select group of catastrophe bond investors.
The use of catastrophe bonds as a source of reinsurance protection from the capital markets hasn’t changed at State Farm though, with the Merna Re issues typically providing the insurer with cover against losses from New Madrid zone earthquakes.
For this latest transaction, Merna Re II Ltd., a Bermuda domiciled special purpose insurer, has issued and sold $300 million of Series 2021-2 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 reinsurance against losses from earthquake events we’re assuming (possibly those occurring 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, maturing in June 2024.
It’s worth noting here than State Farm has sponsored multi-peril cat bonds in the past. But given that its track-record suggests quake coverage is its preferred target with a cat bond, we make that assumption again here.
The notes were priced to pay investors a coupon of 5.5%, we understand.
Unfortunately we don’t know the initial expected loss for this cat bond, but at a 5.5% coupon these look to be a little lower down the tower, so higher in terms of attachment risk, than other recent Merna Re deals. For example the April issue paid a coupon of 3.75%.
This is State Farm’s thirteenth cat bond issuance under the Merna Re name and fourteenth cat bond transaction we’ve covered from the carrier, dating back to its first in 2000.
State Farm has been a particularly regular sponsor, returning to the catastrophe bond market every year since 2013, but this is the first year it has returned twice in since 2010, as we said earlier.
With catastrophe bond pricing seen as attractive for sponsors right now and deal execution resulting in tight spreads and price drops, it’s no surprise State Farm has chosen to upsize on its catastrophe bond backed reinsurance in 2021.
State Farm’s more privately marketed approach to the catastrophe bond market has helped it develop deep relationships with key ILS investor and ILS fund markets, 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 to the renewal process, from across both traditional and ILS markets, helping a sponsor to identify the best source and cost-of-capital for its overall reinsurance program.