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Alternative investment and private assets

Source: Asia Insurance Review | Aug 2018

Chief investment officers within insurance companies in Asia, like other institutional investors, have been having a tough time in recent years thanks to quantitative easing. Aviva InvestorsIain Forrester thinks help could be found in an outsourced solution that offers bespoke investment services for global insurance companies.
By Paul McNamara
In Asia the Aviva brand is probably best known for its pioneering business model in the insurance sector under the guidance of Aviva Digital global chairman Chris Wei. But another big part of Aviva’s brand strength comes through Aviva Investors, the global asset manager with expertise in fixed income, equity, multi-asset and alternative investments.
Aviva Investors is the investment arm of the UK’s largest insurer, Aviva, and has been managing assets since 1972. In 2008, Aviva Investors became the trading name for a group of asset-management businesses owned by Aviva under a single management structure and brand.
Aviva Investors head of insurance investment strategy Iain Forrester spoke to Asia Insurance Review about how the firm helps to design and customise investment solutions for their global insurance clients.
“We help insurance companies achieve their desired outcomes by investing in a wide range of assets including alternative income and private assets,” said Mr Forrester. “This is a big theme and a strength of ours – meeting the various regulatory and accounting constraints that the insurance companies have and delivering the transparency of reporting that those companies need in order to manage their balance sheets.”
Pedigree, chum
As outlined above, while the Aviva name might be relatively new, the asset management capabilities of the group stretch back many years. “We have been investing assets for insurance companies for many, many years,” he said. “On the alternative income side we have been doing real estate finance for over 30 years and we manage over $400bn of insurance assets. Recently we have been consolidating that expertise and capability, building out our insurance solutions team, and increasingly working with external insurance companies as well as our Aviva clients.”
While the business has its roots in Europe, it is becoming an increasingly global concern, and matches the geographic growth of Aviva itself. “Our primary area of expertise for real assets is within the UK and Europe but we operate globally in public markets and have an investment team in Singapore managing around $5.4bn in assets. And through Aviva’s presence in Asia, we have a lot of experience in working with Asian clients,” Mr Forrester said. “Some of the topical issues for insurers in Asia are new regulatory capital regimes and the introduction of IFRS9 and IFRS17.”
A new breed of assets
Alternative income assets for Aviva Investors typically include private debt, infrastructure debt, real estate finance, structured finance and private corporate debt but also infrastructure equity investments including whole-project and unleveraged equity and real estate long-income solutions. 
Mr Forrester said, “What we are seeing is that European insurers are looking to increase their allocations from around 6.5% up to over 9% over the next one to three years. That trend into private assets is a global one that we are seeing across insurance investments.”
It is a truism to say that most investors have been searching for yield ever since the Federal Reserve decided to tackle the fall-out of the global financial crisis by making money cheap. Insurance CIOs have not been immune to the macro environment. “Reducing levels of yield are one key driver,” said Mr Forrester. “This has encouraged insurance companies to look at a broader range of investments.
“Traditionally they would have focused on public fixed income, equity and some insurers used alternatives but the yield environment has allowed insurance companies to broaden those investment horizons. As banks have withdrawn from some of the longer-term financing market, there have been more opportunities for insurance companies in that space.”
The reality, of course, is not quite so simple. “It is not solely a search for yield,” he said. “In many cases insurers are also investing in assets that provide better diversification – both in terms of the issuers themselves but also in the underlying drivers of credit risk – or assets that have more security – so assets that are secured on individual properties or operating projects such as toll roads.
“There has definitely been a focus on diversification and downside protection as well as illiquidity premia. What we found from our survey was that those three factors were the key drivers for insurers investing in these types of assets. So we are seeing a range of drivers for insurers moving into alternative incomes and private assets.”
Follow the investment mandate
While large institutional investors typically find that their investment palette is constrained by an investment mandate of some kind, insurance companies are just as likely to be constrained by regulation. “It depends by country and by region,” Mr Forrester said. “The starting point for insurers comes back to what Solvency II in Europe describes as the prudent person principle and, more widely, it is about investing prudently and conservatively to deliver pay-outs to customers as and when they are required. So insurance companies are investing so they can pay money out to their customers at the maturity of a savings product or on an insurance event.
“That focus on liabilities and investing in a way that aligns the assets to those liabilities is essential in an insurance context. Overlaying those qualitative requirements, you then have various quantitative and other restrictions on insurance companies because of the capital regime that is in place or due to other restrictions on specific types of assets – and clearly that differs across markets.”
For much the same reason, insurance companies often find that they have to invest premium income from one market in the same market. “Under risk based capital regimes, there is normally a capital charge in respect of currency mismatch risk so if you are investing in US dollars to back a Singapore dollar product, you would have to hold capital against the fact that you are investing in a currency that is different from the liabilities,” Mr Forrester said. “This will typically mean that insurance companies will look to invest in the currency of their assets.”
Looking overseas
Many of the markets in Asia are still emerging and so may not have a great deal of depth across all asset classes. In cases like this, insurance investors may be forced to look to offshore markets. “For Asian insurers, often in their domestic markets there are fewer assets available at longer durations, for example. We do then see some insurance companies looking to invest overseas either to get access to longer-dated assets or to improve the diversification within their portfolio and then they need to form a view as to how much of that overseas exposure they wish to hedge back to their domestic currency,” said Mr Forrester.
Aviva Investors finds that it is talking to insurance companies who manage their own assets as well as those who outsource their asset management. “What we are increasingly seeing is firms adopting a hybrid model where they have some assets classes that they will manage in-house or through an affiliated asset manager and then they will have some assets where they will choose to use an external manager,” Mr Forrester said. 
“This might be an asset class where they have no prior expertise or a geography where they don’t want to build a specific investment capability and they will therefore look to use an external manager. For example, when we are talking to European insurers about alternative income, we see there is a wide mix across firms – some are looking to use fully outsourced models and some are using a mix between in-house and external capabilities.”
Growth in alternatives investing
Alternative income is a growth area globally as well as being a specialisation of Aviva Investors. “We have established the formation of a new real assets business, bringing together direct real estate, infrastructure, structured finance and private debt under a single platform. That’s about $50bn across the spectrum and about half of that is in respect of alternative income,” Mr Forrester said. “Within the UK, for instance, we were the largest originator of infrastructure debt in 2017 and our breadth of origination capability gives us access to assets in the private market that other investors might not see and the ability to identify the attractive deals for clients across the alternative income markets.
Asian insurers seem to be responding positively to the offering of specialist investment that help in these emerging investment areas. “The interest in private assets across Asian firms continues,” Mr Forrester said. “How they seek to access that exposure is going to vary. For Chinese firms, the opportunities around BRI are very attractive at the moment. More widely, we see a desire to access these longer-dated assets that provide secure cash flows and increasingly insurers are looking at geographic diversification within that.
“It comes down to the individual insurance companies and what is the nature of their liabilities and the constraints that they have as well as their appetite for overseas assets. But we also provide a range of solutions across public assets, in short-dated funds that provide very attractive return on capital, and in multi-asset and multi-strategy solutions. Really the focus of our conversations with insurers is to dig down into the core issues and challenges that those individual insurers are facing and trying to see if there is an area where we can help them meet their investment outcomes.” A 
Mr Iain Forrester is Head of Insurance Investment Strategy at Aviva Investors.
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