Al Denholm, CIO, Solutions, explains how Aviva Investors' heritage helps it meet the demands of insurers to optimise their asset portfolios

For insurers, what makes Aviva Investors stand out from its peers?

Aviva Investors' insurance heritage gives us a deep understanding of the investment challenges and regulatory constraints faced by insurers today.

Our focus on insurance clients' target outcomes means we have long-standing, demonstrable expertise in managing private assets, including innovative transactions suitable for matching-adjustment portfolios. We are one of the few asset managers with a broad platform monitoring the premia available in private markets, allowing us to better target relative value opportunities.

Lastly, aligned to our focus on transparency, we've developed an Insurance Analytics dashboard. This provides our insurance clients with up-to-date information on their assets (including capital metrics).

What are the main asset classes currently favoured by insurers?

The main driver of insurers' long-term position is the prevailing macro conditions in the market. With yields continuing to remain low, this has presented challenges in investment approach, particularly with the added layer of a rapidly-evolving regulatory landscape.

Whilst public fixed income continues to be a focus in insurers' portfolios, private debt allocations are increasing as insurers look to improve diversification and enhance downside protection of portfolios. Structured equity has also played to this preference for limiting exposure on the downside without losing all the potential upside.

Strategies that straddle public and private markets are also in-demand, offering agility in investment approach and the ability to react more quickly to conditions and opportunities as they arise.

Overall, the shift has been towards a more tailored investment approach as insurers look to maximise return on capital – within asset classes as well as across asset classes. And insurers are increasingly looking to optimise the levels of liquidity within their portfolios.

Why are alternative assets increasingly important to insurers?

Alternative assets can help insurers deliver the risk-adjusted returns they need to meet their business objectives. Investing in private markets is not a new development for insurers – UK insurers have invested in real estate for many years.

A key enabler for private market investment is a detailed understanding of the insurer's liquidity needs. Where excess liquidity is a long-term, structural feature of portfolios, insurers can consider private investments. Where that excess liquidity may only be a short-term feature, insurers can still consider alternatives to same-day, money-market funds.

The introduction of Solvency II has also brought alternative assets to the fore. They are a key component of cashflow-driven investing strategies, reflecting the increased focus on matching the interest rate sensitivities and liquidity profiles of the liabilities.

What challenges does regulation present to the way insurers invest?

Changes in regulation have meant the market risks of insurers are subject to closer scrutiny, whether that be through quantitative capital charges or qualitative risk management requirements as set out in Solvency II.

The prudent person principle under Solvency II requires insurers to have a sufficient level of understanding of the risks arising from their investment strategies. As a result, we've seen insurers build up their investment teams as they diversify into new asset classes.

The capital charges of Solvency II have also impacted asset allocations for insurers, most notably leading to falls in allocations to securitisations and unhedged equity exposures. Allocations have increased to sections of the private credit market – including infrastructure debt and real estate finance – which can benefit from relatively favourable treatment under Solvency II.

How important is ESG and responsible investment for Aviva Investors?

As long-term stewards of our clients' assets, we embrace our duty to act responsibly when investing on their behalf, as part of a firm-wide responsible investment philosophy.

The progress made in embedding ESG factors across all asset classes at Aviva Investors has continued under Euan Munro's tenure as CEO, and it is our belief that ESG considerations deliver materially better investment outcomes for our clients, but also lead to improvements for society and the environment.

These factors are included in every layer of our investment analysis and decision-making across both alternative and liquid asset classes.

For more information www.avivainvestors.com

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