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Ask the Team

October 26, 2017

 

In the first half of 2017, catastrophe bonds and ILS issuance exceeded all previous records. What is driving that demand and how does it impact the market?

 

With issuance volume surpassing USD $8 billion, nearly all first half 2107 new issuance records for cat bonds were surpassed this year.  These metrics include: largest monthly, quarterly and half-year issuances, as well as largest average deal size and largest overall market size.  Currently the cat bond market has approximately USD $25.5 billion outstanding, despite a record of USD $6.5 billion in maturities during the period.  The total Insurance Linked Securities (ILS) market size is estimated to be approximately USD $85 billion.1

 

In general, investor demand for cat bonds remained strong as many market participants continued to consider the correlation features and value proposition of the instruments.  That demand, along with receiving proceeds from maturing bonds was a beneficial combination for sponsors.  As a result, sponsors were able to dictate broader coverage, new perils and tighter pricing, all while growing their issuances. 

 

During the first half one of the more innovative issuances were notes that provided coverage for pandemic risks in the developing world. The World Bank, through its Pandemic Emergency Financing Facility (PEF), offered over $500 million of coverage to developing countries against the risk of pandemic outbreaks across the next five years. This offering included $320 million in pandemic catas­trophe bond issuance. This deal is the first time that the pandemic risks of low-income countries has been transferred to the capital markets and creates an entirely new market for pandemic risk insurance. Previously, a number of mortality cat bonds have transferred pandemic risk from high income countries to ILS investors.  This was the first transaction issued that aimed to mitigate a catastrophe rather than cover losses after an event.  The quality of the sponsor, the extensive historical data and latest pandemic model, along with the risk and potential return profile of this offering, made the Amundi Pioneer ILS investment team constructive on this opportunity.  

  

The impact of hurricanes Harvey, Irma and Maria, along with the earthquakes in Mexico is expected to increase reinsurance pricing as we head into the year-end renewal period.  There are a number of weeks ahead for the 2017 US hurricane season, as well as other market dynamics, but our overall view for ILS remains constructive within a diversified portfolio.

 

1Source: Artemis

Please consider the Fund’s investment objectives, risks, charges and expenses carefully before investing. The prospectus contains this and other information about the Fund and should be read carefully before you invest or send money. To obtain a prospectus and for other information on any Pioneer fund, call 1-844-391-3034 or visit our web site at amundipioneer.com.

Individuals are encouraged to seek advice from their financial, legal, tax and other appropriate advisers before making any investment or financial decisions or purchasing any financial, securities or investment-related product or service, including any product or service described in these materials. Amundi Pioneer does not provide investment advice or investment recommendations.

A Word about Risk:

Certain fees and expenses are associated with an investment in Pioneer ILS Interval Fund.

Please see a prospectus for a complete discussion of the Fund’s risks. The Fund is a non-diversified, closed-end management investment company designed primarily as a long-term investment. The Fund is not a complete investment program. The Fund invests primarily in insurance-linked securities (“ILS”), which are high yield debt securities that involve a high degree of risk. The Fund is operated as an interval fund, meaning the Fund will seek to conduct quarterly repurchase offers for a percentage of the Fund’s outstanding shares. Although the Fund will make quarterly repurchase offers, the Fund’s shares should be considered illiquid.

Insurance-linked securities may include event-linked bonds (also known as insurance-linked bonds or catastrophe bonds). The return of principal and the payment of interest on event-linked bonds are contingent on the non-occurrence of a predefined “trigger” event that leads to physical or economic loss, such as a hurricane or an aerospace catastrophe. Event-linked bonds may expose the Fund to other risks, including, but not limited to, issuer (credit) default, adverse regulatory or jurisdictional interpretations and adverse tax consequences. The Fund may also invest in structured reinsurance investments or similar instruments structured to comprise a portion of a reinsurer’s catastrophe-oriented business (known as “quota share” instruments or “reinsurance sidecars”). Investors participate in the premiums and losses associated with these underlying contracts, into which the Fund has limited transparency. The size of the ILS market may change over time, which may limit the availability of ILS for investment. The availability of ILS in the secondary market may also be limited. Certain securities, including ILS, structured reinsurance investments and derivatives, may be impossible or difficult to purchase, sell, or unwind. Such securities and derivatives also may be difficult to value. The values of Fund holdings may go up or down, due to market conditions, inflation, changes in interest or currency rates and lack of liquidity in the bond market. Investments in high yield or lower-rated securities are subject to greater-than-average price volatility, illiquidity, and possibility of default. When interest rates rise, the prices of fixed income securities in the Fund will generally fall. Conversely, when interest rates fall, the prices of fixed income securities will generally rise. Investments in the Fund are subject to possible loss due to the financial failure of issuers of underlying securities and their inability to meet their debt obligations. Prepayment risk is the chance that an issuer may exercise its right to prepay its security, if falling interest rates prompt the issuer to do so. Forced to reinvest the unanticipated proceeds at lower interest rates, the Fund would experience a decline in income and lose the opportunity for additional price appreciation. The Fund may invest in floating rate loans and similar instruments which may be illiquid or less liquid than other investments. The value of any collateral can decline or be insufficient to meet the issuer’s obliga­tions. The securities issued by US Government-sponsored entities (e.g., FNMA, Freddie Mac) are neither guaranteed nor issued by the US Government. The Fund may use deriva­tives, such as swaps, inverse floating rate obligations and others, which can be illiquid, may disproportionately increase losses, and have a potentially large impact on the Fund’s performance. Derivatives may have a leveraging effect. Investing in foreign and/or emerging market securities involves risks relating to interest rates, currency exchange rates, and economic and political conditions. These risks may increase share price volatility. There is no assurance that these and other strategies used by the Fund will be successful.

USCEXP-2018-10-26-ADID-285809-CLC-1Y-T