State Farm to launch $400M catastrophe bond

BLOOMINGTON, Ill.—State Farm Mutual Automobile Insurance Co. is planning to launch a $400 million catastrophe bond to cover a portion of its U.S. earthquake exposure, excluding California, market sources confirmed Thursday.

The bond, Merna Re II, is being marketed to investors and is expected to close in April. Depending on investor demand, the bond could grow to $700 million, sources said.

The deal is structured to trigger on an indemnity basis, sources said.

The transaction is expected to replace State Farm’s $1.2 billion cat bond, Merna Re, which the Bloomington, Ill.-based insurer issued in 2007, and is scheduled to mature in June of 2010.

If successful, it will be the third cat bond issued in 2010. Experts have predicted strong activity levels for the sector this year, with issuance volume expected to reach $5 billion.

Swiss Reinsurance Co. Ltd. also is planning to launch a new cat bond under its Successor program. The bond, Successor X Ltd., provides Swiss Re with three years of protection against U.S. hurricane and European windstorm risks through 2013, according to New York-based Standard & Poor’s Corp. Last week, S&P assigned Successor X a preliminary rating of B-.

In January, Hartford Financial Services Group Inc. closed a $180 million cat bond to cover a portion of its U.S. hurricane risks through 2014.