August 24, 2016 / 12:40 PM / in 2 years

Italy quake unlikely to trigger 200 mln euro cat-bond default-investors

LONDON, Aug 24 (Reuters) - A powerful earthquake in Italy on Wednesday is not likely to force a 200 million euro ($225.56 million) bond issued to cover such risk into default as the bond has low exposure to the affected region, investors said.

The earthquake devastated a string of mountainous towns in central Italy, trapping residents under piles of rubble, killing at least 38 people and leaving thousands homeless.

Issued last year by insurer UnipolSai, the Azzurro Re bond was the first so-called catastrophe bond to cover earthquake risk in Italy. Most similar bonds hedge against hurricane or earthquake damage in North America or Japan.

Investors who buy a catastrophe bond enjoy a high yield but lose the value of the bond if an event occurs within agreed parameters, including factors such as location and severity.

Default leaves the bond issuer with capital to help pay insurance claims related to the catastrophe.

The U.S. Geological Survey, which measured Wednesday’s quake at 6.2 magnitude, said it struck near the Umbrian city of Norcia, while Italy’s earthquake institute INGV registered it at 6.0 and put the epicentre further south, closer to Accumoli and Amatrice.

Azzurro Re only has a 0.2 percent exposure to Umbria, one catastrophe bond trader said, meaning default was unlikely, though he added that it was too early to be sure. “Initial gut feel is that Azzurro will be OK,” he said.

The low exposure to Umbria compares with a 34.7 percent exposure for the bond to an earthquake in Rome, the trader added.

Specialist fund manager Twelve Capital, meanwhile, said an analysis of its modelling of the event suggested it would not be affected.

“We do not think the bond will be triggered,” said John Butler, head of investment management at Twelve Capital. “This is a factor of the more rural nature of the area of the quake.”

The bond was trading at a stable price of 100, Butler added, showing the market did not expect default.

$1 = 0.8867 euros Reporting by Carolyn Cohn

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