Market Commentary: Puerto Rico Earthquakes – Insult to Injury

Author: , Post Date: January 15, 2020

For the people of Puerto Rico, natural disasters have become all too commonplace. Two years ago there was Hurricane Maria, which claimed thousands of lives and caused billions in damages.

Market Commentary Puerto Rico

Now the island has experienced a series of earthquakes (the largest being a magnitude 6.4), which have again caused destruction and again brought fear and uncertainty. Our hearts go out to the people of Puerto Rico, our fellow Americans. The devastation hits especially close to home for Cumberland as many of our employees have family that call the island their home.

Governor Wanda Vazquez has declared a state of emergency. Total damage estimates remain uncertain at this point, though the damage is likely much more limited than the devastation Maria caused. The initial damage estimate of $110 million was made after the magnitude 6.4 quake that shook the island on Tuesday, January 7th, but before the 5.9 quake that followed on Saturday, January 11th, along with numerous other aftershocks. Time will tell the longer term damages to the island’s economy and future.

According to FEMA, President Trump has approved an emergency declaration, allowing direct federal assistance for emergency measures to protect lives, property, and public health. The Commonwealth awaits a major disaster declaration from the president. Federal dollars will likely flow to the Commonwealth to rebuild what has been damaged or destroyed. The rebuilding that occurs after a disaster and the flow of federal dollars, insurance proceeds, and additional workers generally boosts the economic activity of an area. That expectation is being borne out by the better-than-expected revenues the Commonwealth has clocked post Maria. The resilient folks on the island will move forward together and find ways to adapt.

Power and water have been restored to many, but the systems remain fragile, and power in some areas was lost again after Saturday’s 5.9 quake. The United States Geological Survey (USGS) is forecasting a 68% probability of a magnitude 5.0 earthquake in the coming week, with aftershocks to continue, at a decreasing frequency, for the next 30 days. So the island isn’t out of the woods yet.

For Cumberland’s Insured Puerto Rico Strategy the earthquakes are less significant. To note that fact is not to downplay the damage to both people and property. Our strategy depends on the financial health of carefully selected municipal insurers. In particular, Assured Guaranty has significant claims-paying resources and is proactive in its approach to managing its book of business, including its exposure to Puerto Rico. We continue to believe the insurers utilized in the strategy remain sufficiently capitalized and able to pay principal and interest when due.

Patricia M. Healy, CFA
Senior Vice President of Research & Portfolio Manager

Shaun Burgess
Portfolio Manager & Fixed Income Analyst

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