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What are Insurance-Linked Securities?

July 17, 2017

 

Insurance-linked securities (ILS) are financial instruments whose performance depends upon insurance risk rather than traditional financial risk. The most widely accepted forms of insurance-linked securities are those related to catastrophe risk, or the risk of primarily natural disasters (perils). The major types of perils covered in the catastrophe risk market include:

 

 

Why has demand for ILS Increased?

 

The ILS market has seen significant growth, particularly in recent years. As of March 31, 2017, the overall outstanding ILS market (primarily represented by catastrophe bonds) was approximately $27.2 billion, nearly 20% larger than at the same point during 2013.1 Recent significant events, such as Hurricanes Katrina and Sandy, the Japanese Earthquake of 2011 and the financial crisis of 2008 have also “tested” the asset class, increasing investors’ comfort level.

 

 

Most recently, investors have turned to ILS in search of:

 

Diversification through Low Correlations: Because the performance of these securities

is linked to non-financial risks – natural disasters, longevity risk or life insurance

mortality – their performance is not tied to that of the broader bond markets. (See below.)

 

Low Correlation to Traditional Asset Classes

 

Source: Morningstar as of 6/30/17. ILS represented by the Swiss Re Global Cat Bond Total Return Index, which tracks the price return and the total rate of return for US dollar denominated catastrophe bonds. US Stocks represented by the S&P 500 Index, a commonly used measure of the US Stock Market. Commodities represented by Bloomberg Commodity Total Return Index. Investment Grade Corporates and High Yield Corporate Bonds represented by the Bloomberg Barclays US Aggregate Bond Index and the BofA ML US High Yield Index, respectively. Indices are unmanaged and their returns assume reinvestment of dividends and, unlike mutual fund returns, do not reflect any fees or expenses associated with a mutual fund. It is not possible to invest directly in an index. Correlation: The degree to which assets or asset class prices have moved in relation to one another. Correlation ranges from -1 (always moving in opposite directions) through 0 (absolutely independent) to 1 (always moving together).

 

 

Attractive Return Potential: Performance for catastrophe bonds (a type of ILS) has

exceeded those of similarly rated corporate securities, albeit with more risk.

                         

A Measurable Risk Profile: Unlike corporate bonds, where risk is tied to financial

performance, ILS have actuarial risk – the risk of securities defaulting due to specific

disasters. Analysis of potential returns and losses for each security is supported by a rich

body of data that has been well-modeled for decades by the insurance industry.

                         

A Hedge against Interest Rate Risk: The primarily floating rate structure of ILS links a

component of their performance to a benchmark rate (LIBOR2 or US Treasury yields),

which is adjusted frequently, leaving investors with limited interest rate lockup.

 

1 Source: Swiss Re. 2 London Interbank Offer Rate (LIBOR) is used as a reference for short-term interest rates.

 

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-2018-08-24-ADID-249944 -CLC-1Y-T