Catastrophe bond capacity is maturing, and not much of it is coming back. In the first quarter, $1.8 billion in cat bond risk capital matured, and only $508 million returned in the form of new issuances, according to Thomson Reuters. This quarter, $2.77 billion is maturing, and the absence of first-time issuers makes it unlikely that the market will replace it all. More than a billion of it was from State Farm's Merna Re transaction. The successor to it has already been issued, cleverly named Merna Re II, at only a fraction of the previous bond.

The first catastrophe bond of the quarter closed on opening day ... and it was a big one. State Farm's Merna Re II transaction was good for $350 million in risk capital, upsized from the earlier reported amount of $250 million. Though large, it doesn't compare to the previous Merna Re catastrophe bond, which set a record at $1.2 billion that remains to be beat.

Merna Re II was oversubscribed, but State Farm only wanted to place $350 million, Thomson Reuters reports (registration required). According to one investor who knew about the transaction, "The deal was oversubscribed at +365 basis points and after being upsized to $350 million." The investor added, "The initial price talk was 365 - 405 bp, but the deal got priced at 365 bp. However, Merna was a simple transaction and State Farm only wanted to place 350 million."

Merna Re, the largest catastrophe bond of all time, is set to mature in June, and State Farm is already putting together its replacement, the creatively named Merna Re II. The successor, planned for issuance in April, is said to be for $400 million in risk capital, though investor demand could push it as high as $700 million. This still pales in comparison to the $1.2 billion that the original brought in the door.

If State Farm is able to stimulate demand for Merna Re II, which would protect the company from non-California earthquake risk in the U.S., it will be third cat bond to come to market in 2010, which is expected to be a strong year for this form of risk transfer. The cat bond market fell silent after the near-collapse of American International Group (AIG) in September 2008 but was still the third busiest in terms of capital issued in the history of the cat bond market. Heading into 2009, prospects for the cat bond space seemed uncertain, but a robust fourth quarter eventually resulted in a year-over-year increase, driven mostly by repeat issuers.

This post is part of our Big Company, Small Town series, featuring large companies and the small towns in which they are headquartered.

State Farm is the world's largest mutual property and casualty company, which means its owned by its policy holders. In 2007, State Farm Mutual Automobile Insurance Company paid $1.25 billion in dividends to its mutual auto insurance policy holders. (In the interest of full disclosure, I did get one of those checks.)

The corporate headquarters are based in Bloomington, Illinois, where State Farm was founded in 1922 by George J. Mecherle. He thought farmers were being charged too much for car insurance because they don't drive as much as city folk and didn't incur as many loses. Well, the insurance companies available at the time didn't agree with him, so he started his own car insurance company for farmers.

Today, State Farm has grown into the largest insurer of cars and homes in the United States, as well as the leading insurer of watercraft. State Farm is also a leader in insuring Canadian cars and homes. State Farm serves a total of 77 million auto, fire, life, and health policies in the U.S. and Canada with 67,000 employees and 17,000 agents. About half of its employees are involved in claims processing in one of its more than 390 claims offices.