State Farm gets $500m reinsurance with new Merna Re II cat bonds

US primary insurance giant State Farm has returned to the catastrophe bond market and secured $500 million of US property catastrophe reinsurance protection from two series of Merna Re II cat bond notes, with a $200 million Merna Re II Ltd. (Series 2022-2) and $300 million Merna Re II Ltd. (Series 2022-3) issuances.

State Farm continues to put the capital markets at the heart of its catastrophe reinsurance arrangements, typically bringing at least one new catastrophe bond to market each year.

Often these transactions have a US earthquake focus, typically California or New Madrid quake region perils, but it has also been known to seek Florida named storm reinsurance from the capital markets through its Merna Re series of cat bond deals.

State Farm last visited the catastrophe bond market for reinsurance in March, securing $300 million of US quake protection with a Merna Re II Ltd. (Series 2022-1) transaction.

In 2021, the company secured a further $350 million of earthquake cover with a Merna Re II Ltd. (Series 2021-1) issuance and then $350 million of Florida named storm and severe thunderstorm reinsurance with a Merna Re II Ltd. (Series 2021-2) deal.

This time around, State Farm has sponsored the issuance of two series of catastrophe bond notes, that together have secured the insurer $500 million of US property catastrophe reinsurance protection.

That makes it one of the largest single visits to the cat bond market that State Farm has ever made. This new issuance is also notable as 2022 is the first time we’ve recorded three series of Merna Re cat bonds from the insurer in a single year.

As ever, State Farm has placed its new catastrophe bonds relatively privately with a club, or select group of initial investors, we understand.

Enabling State Farm to source $500 million of fully-collateralized reinsurance capacity, from insurance-linked securities (ILS) funds and investors, with a full 144A cat bond, but on a privately marketed and placed basis.

Merna Re II Ltd., State Farm’s Bermuda domiciled special purpose insurer, has issued two series of cat bond notes, with both having been sold to cat bond funds and ILS investors, and the proceeds used to collateralize two reinsurance agreements between the issuing vehicle and the sponsor State Farm.

Merna Re II Ltd. has issued $200 million of Series 2022-2 Class A notes and $300 million of Series 2022-3 Class A notes.

Both of the series of notes will provide State Farm with US property catastrophe reinsurance protection, on an indemnity trigger and we expect per-occurrence basis, with the $500 million of protection running across a three-year term to July 7th 2025.

At this time further details, such as the covered perils, are unknown. But given the dual-series issuance, the timing around the mid-year reinsurance renewals, it’s safe to assume there is more than just US earthquake risk involved and one of these could be Florida, or US wind focused, we understand.

The $500 million of cat bond notes issued by Merna Re II will now be more broadly available to funds and investors on the cat bond secondary market.

State Farm is a particularly regular sponsor of cat bonds, having sponsored new deals every year since 2013 with a Merna Re cat bond.

Find details of all of State Farm’s catastrophe bonds in the Artemis Deal Directory.

The insurers’ private, or club based approach to the catastrophe bond market, has helped it to develop deeper relationships with key ILS investor and cat bond fund markets, we’re told, especially those that also play an important role in its traditional reinsurance renewal.

State Farm also utilises the club approach to secure important pricing indications for its reinsurance renewal, from across both traditional and ILS markets, which helps the sponsor identify the best sources of and cost-of-capital for its overall reinsurance program.

In this case, with $500 million of cat bonds issued across two series, a first for State Farm, it seems conditions in the cat bond market were deemed attractive enough to secure more reinsurance there this year.

Including this new $500 million of cat bonds, State Farm now has $1.7 billion of cat bond backed reinsurance cover outstanding and has moved up to fifth in our cat bond sponsors leaderboard.

We’ve added the new $200 million Merna Re II Ltd. (Series 2022-2) and $300 million Merna Re II Ltd. (Series 2022-3) catastrophe bonds to the Artemis Deal Directory, where you can read about and analyse details of almost every cat bond ever issued.

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Steve Evans

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