MORGAN, LEWIS & BOCKIUS LLP
ONE FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
August 28, 2018
VIA EDGAR
Securities and Exchange Commission
Division of Investment Management
100 F Street, NE
Washington, D.C. 20549
Re:Pioneer ILS Bridge Fund
Pre-Effective Amendment to Registration Statement on Form N-2
File Nos. 333-212537; 811-23172
Ladies and Gentlemen:
This letter is to respond to a comment we received from Mr. Jay Williamson
of the Staff of the Division of Investment Management of the Securities and
Exchange Commission (the "Commission") regarding Pre-Effective Amendment No. 2
to the Registration Statement on Form N-2 of Pioneer ILS Bridge Fund (the
"Fund"). Following is the Staff's comment and the Fund's response thereto.
1. Comment: The Staff noted that, in response to the Staff's comments on
Pre-Effective Amendment No. 1 to the Fund's Registration
Statement on Form N-2, the Fund indicated that storm paths do
not generally influence the valuation of the Fund's
investments, but also implied that the valuation process
considers exposure to potential losses. The Staff noted that,
in some ways, insurance-linked securities appear to be similar
to credit default swaps, and noted that the prices of credit
default swaps can fluctuate based on the probability of a
"trigger" event occurring. Similarly, the Staff noted that one
might expect the value of an insurance-linked security to
fluctuate significantly immediately prior to, during or after a
"trigger" event, based on the security's exposure to potential
losses. The Staff requested that the Fund clarify the Staff's
understanding of how the valuation process works and how the
Fund can reliably strike a net asset value during a storm that
potentially impacts one or more investments.
Response: For the reasons discussed below, the Fund believes that it can
reliably strike a net asset value during a catastrophic storm
that potentially impacts one or more investments.
First, some of the insurance-linked securities in which the Fund
may invest are traded on an exchange. Exchange-listed securities in
which the Fund may invest include event-linked bonds, which
generally will be valued at the bid price obtained from an
independent third party pricing service. The price of an
event-linked bond would generally be expected to fluctuate in
accordance with market activity, including during a storm that that
potentially impacts such bond.
Other securities in which the Fund may invest are not listed on an
exchange, including quota share instruments (also known as
"reinsurance sidecars"), collateralized reinsurance investments,
industry loss warranties and other reinsurance-related securities.
Such reinsurance-related securities generally will be valued at the
price provided by an insurance transformer based on a formula
approved by the Board of Trustees.
The price of a reinsurance-related security may not fluctuate
significantly immediately prior to or during a storm; however, that
does not necessarily indicate that the security's price is
unreliable. It is important to keep in mind that even a severe
event may not be a "trigger" event that would result in losses
under the terms of a particular reinsurance policy. Even if it is
likely that an event constitutes a "trigger" event under the terms
of the policy, it may be difficult to meaningfully evaluate the
severity of a potential loss while the event is occurring.
Therefore, there may not be enough information available to
reliably adjust the price of a reinsurance-related security prior
to the occurrence of a severe event.
As a general matter, both actual and estimated losses affect the
value of a reinsurance-related instrument calculated by the
insurance industry valuation model. Estimated losses generally are
reflected as "incurred but not reported" losses (IBNR) in the
insurance industry valuation model.
IBNR estimates take into account relevant known information about
the event (such as severity/magnitude information - i.e., central
pressure, radius of maximum winds, sustained time period of maximum
winds - as well as explicit locations affected) in reference to
instrument exposures through underlying reinsurance policies (e.g.,
the "attachment points" where the primary insurer's retention
requirements have been met, and the reinsurance has to respond to
losses).
Information about the event then can be compared to loss experience
from similar historic events, including through models. IBNR
estimates improve as more information about the event is known
(information both as to the nature of the storm and observed
impact, industry estimates, etc.), including initial claims
activity.
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It is possible that information available for a current
catastrophic storm (i.e., a category 5 hurricane) that is impending
at the time of valuation (i.e., within 24 hours of projected
landfall) given the reinsurance-related security's specific
exposures, could be reflected in the IBNR losses and, therefore,
could affect the value of the instrument (assuming a current sale).
In such a situation, available information (including probabilistic
modeling) about storm path would be relevant, in view of
information about the instrument's exposures. Such an estimate
would take into account the risk of over-prediction of losses. This
type of reserve would be a form of IBNR. Such a loss estimate
performed prior to the occurrence of an event - landfall for a
hurricane - would be less reliable than an IBNR estimate conducted
after the hurricane has hit.
It is therefore possible that information for a severe event that
is impending at the time of valuation could be reflected in the
valuation formula and, under such circumstances, the price of the
affected security would be adjusted during the event. However, even
if the insurance transformer does not adjust the security's price
during an event given the circumstances, the security's price
generally would reflect any estimated losses shortly after the
event, depending on the security's specific exposures. Furthermore,
if the Adviser has enough information to conclude that the price of
a security provided by the insurance transformer is not reliable,
the security would be fair valued in accordance with the Fund's
valuation procedures. For example, the Adviser could determine that
the projected landfall of a current catastrophic storm that is
impending at the time of valuation indicates a high probability of
significant loss to the security's specific exposures, and that the
IBNR loss in the valuation formula does not reflect the potential
loss. The Adviser may also consider the price fluctuation of
similar instruments, such as exchange-listed event-linked bonds, in
determining the reliability of the valuation of the price of a
security provided by the insurance transformer.
The Fund has considered the Staff's observation about credit
default swaps. The Fund believes that information about the current
financial condition and business operations of an issuer underlying
a credit default swap is likely to be widely available and more
reliable in predicting potential loss of value than available
information that would be relevant in assessing whether an
impending storm will be sufficiently catastrophic to materially
affect reinsurance instrument values. Accordingly, the price of the
credit default swap can fluctuate based on the probability of a
"trigger" event occurring because the market has sufficient
information to analyze the probability and extent of loss under the
swap. In contrast, as indicated above, there likely will not be
sufficient information available prior to or during a storm to
confirm that losses under the terms of a reinsurance-related
security have occurred or will occur, and to meaningfully evaluate
the security's exposure to potential loss. As discussed above, to
the extent such information is available and reliable, it may
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be reflected in the IBNR input to the valuation formula or in any
fair value determination in accordance with the Fund's valuation
procedures.
Please call the undersigned at (617) 951-8458 or Toby Serkin at
(617) 951-8760 with any questions.
Sincerely,
/s/ Jeremy Kantrowitz
Jeremy Kantrowitz
cc:Terrence J. Cullen
Christopher J. Kelley
Roger P. Joseph
Toby R. Serkin
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