Mexico’s cat bond coverage continues, despite shuttering of FONDEN

Mexico’s in-force $485 million IBRD / FONDEN 2020  catastrophe bond will continue to provide the country with important disaster insurance protection, as the beneficiary of the cover has been shifted away from the shuttered FONDEN disaster fund to the country’s Treasury.

We’re told that a notification has been sent to investors in and holders of the World Bank issued Mexican catastrophe bond, to explain that the coverage it provides will continue uninterrupted, despite Mexico’s Fund for Natural Disasters (El Fondo de Desastres Naturales), more commonly known as FONDEN, having been dismantled.

As we reported last October, FONDEN was set to be dismantled after Mexico’s lawmakers in the senate voted to reform that area of public funding.

Lawmakers had railed against perceived public spending wastage across 109 public trusts that were decided to be shuttered, in partisan action that led to some protests in the government houses.

The lawmakers wanted to divert public spending to support the economic recovery from COVID-19, and so a votes passed decreeing that public trusts providing funding for initiatives such as FONDEN would close, with responsibility for those functions to be passed down to local or regional actors.

That decision put the future of Mexico’s sovereign backed natural disaster insurance financing in doubt, as well as the future of its long-standing catastrophe bond program.

But we can now reveal that the catastrophe bond will continue unaffected, as the notification states that the only change is a shift in beneficiary within the underlying insurance agreement, away from FONDEN and to the government itself.

For the majority of catastrophe bonds Mexico has sponsored over the years, the trustee of FONDEN acted as the insured counterparty for the coverage. The trustee of FONDEN would enter into an insurance agreement with the Mexican government-owned insurer Agroasemex S.A, which in turn entered into reinsurance agreements with a fronting reinsurance entity to secure the protection.

We understand that the insured party will no longer be the FONDEN trustee, given the shuttering of that trust fund and instead has been shifted to Mexico’s Secretaría de Hacienda y Crédito Público, the Treasury or Office for the Treasury and Public Credit, so enabling continuity of coverage.

The most recent World Bank IBRD issued FONDEN 2020 catastrophe bond remains on-risk through until March 2024, so with the change in insured party or beneficiary, Mexico will continue to benefit from this source of important disaster risk insurance.

The transaction will therefore continue to provide its retrocessional reinsurance protection to the ceding reinsurance entity (Swiss Re) and the capital markets protection will now cascade down to the government’s benefit.

It’s encouraging news, as Mexico’s government could have opted to cancel the catastrophe bond, as we understand the insurer Agroasemex could have terminated the insurance agreement.

It suggests a commitment to disaster risk financing and the catastrophe bond structure within Mexico’s government, so the country’s long-running program of capital markets risk transfer through World Bank supported cat bonds looks set to continue.

Mexico has been a recipient of catastrophe bond protection since as long ago as 2006, with the CAT-Mex Ltd. transaction.

The country has repeatedly renewed its insurance and reinsurance coverage from the capital markets through a series of World Bank supported catastrophe bond arrangements ever since.

These included the MultiCat Mexico 2009 Ltd. and MultiCat Mexico Ltd. (Series 2012-1) cat bonds. After which Mexico shifted to use the IBRD issuance platform, with the IBRD / FONDEN 2017 transaction, and then participated in the Pacific Alliance issuance with the IBRD CAR 118-119 deal in 2018, before sponsoring the most recent and largest $485 million IBRD / FONDEN 2020 cat bond in March 2020.