A powerful earthquake in Italy on Wednesday is unlikely to force UnipolSai’s 200 million euro ($226 mln) catastrophe bond into default as the bond has low exposure to the affected region, the Italian insurer said.

The earthquake devastated a string of mountainous towns in central Italy, killing at least 73 people, trapping residents under piles of rubble and leaving thousands homeless.
The Azzurro Re bond, issued by Unipol last year, 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.

A spokesman for Unipol said early estimates indicated the group’s overall exposure to the event was limited.

“The quake is not expected to trigger the group’s 200 million euro Azzurro Re catastrophe bond,” the spokesman said.

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 epicenter 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.

Fund manager Twelve Capital, which specializes in insurance investments, also said an analysis of its modeling 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 said, showing the market did not expect default.

($1 = 0.8867 euros) (Reporting by Carolyn Cohn, additional reporting by Andrea Mandala, writing by Stephen Jewkes; Editing by Susan Fenton)