Italy’s UnipolSai Assicurazioni is tapping the capital markets to offload some of its earthquake risk.

The insurance company is now prepping an as-yet unsized catastrophe bond that will pay investors a set yield for 3.5 years, provided UnipolSai doesn’t incur losses of €500 million ($565 million) or more from an earthquake or related event spelled out by the bond documents.

That’s the threshold at which bondholders would start to see losses. And their investment gets completely wiped out once UnipolSai’s losses from a covered peril reaches €700 million.

Fitch Ratings, which gave the deal, Azzurro Re I, a ‘BB+,’ indicates in a presale that the probability of those figures are slim. The agency said that the estimated losses from covered events if past earthquakes in Italy were to recur — Campania (magnitude 6.9 in 1980), Avezzano (7.0, 1915), Friuli (6.4, 1976) and Messina-Reggio (7.1, 1908) — would not hit the €500 million “attachment point.” In those instances, bondholders would be safe.

The losses are calculated on a per covered-event basis.

The particular earthquake-related risks the cat bond investors are taking on in this deal include not only losses from the actual shaking of the ground but also flooding due to dam ruptures, volcanic eruptions, tsunamis, and even “sprinkler leakage.”

The area covered in the deal is 99.8% in Italy but Fitch points out that the epicenter can be outside the country.

UnipolSai provides earthquake coverage only as an add-on to existing property-insurance policies.

The total cap on indemnity payments in Italy’s insurance industry is €69.6 billion, with industrial-type coverage making up 41.8% and residential/civil 22.0%, according to Fitch.

Willis Capital Markets and Advisory is the sole structurer and bookrunner on the deal.

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