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Farmers to use subordinated notes for cat losses


LOS ANGELES--An affiliate of Farmers Insurance Group has the right to issue $500 million in subordinated notes to cover U.S. catastrophe losses over the next five years, under a facility arranged by Swiss Re Capital Markets involving international banks.

Under the transaction, completed Wednesday after its syndication to international banks, if the Farmers Insurance Group suffers windstorm losses in excess of $1.5 billion, it has the right to issue 10-year subordinated loan notes to major institutions to restore its capital base, according to a statement issued by Los Angeles-based Farmers, a wholly owned subsidiary of Zurich Financial Services Group.

The subordinated loan notes would be issued by Farmers Insurance Exchange.

The $500 million has been fully underwritten by Paris-based Caylon, a subsidiary of Credit Agricole; Frankfurt, Germany-based Commerzbank A.G.; New York-based Citigroup N.A.; and Swiss Re, and has been syndicated to the world's major commercial banks, according to Farmers.

Ron Myhan, the exchange's senior vp, finance, said in a statement that the facility "complements Farmer's reinsurance strategy and is more flexible and cost-competitive than other capital market or reinsurance alternatives. For insurers, this is a positive sign that additional sources of capital may be available to complement their traditional reinsurance and the growing catastrophe bond market."