London-based insurer Aviva is looking to diversify its £51 billion ($69 billion) UK annuities investment portfolio by taking more overseas asset exposure as Brexit casts a pall over the domestic economy.

Both Asia and North America are on its radar, and the firm will be using external asset managers to help raise its foreign allocation, with private debt a big focus.

“Asia is a very under-penetrated market for us both in terms of our exposure and our in-house capability,” said Ashish Dafria, chief investment officer for the UK life business, at a recent forum. As such, this is the kind of area where the firm would outsource mandates to third-party fund houses.

He told AsianInvestor separately that the vast majority of Aviva's UK annuities portfolio is in fixed income, and a very small fraction of it is allocated to Asian assets. 

The firm is looking outside the UK not only for a greater choice of investments, said Dafria, but also – perhaps more importantly – because of the political risk and potential impact of Britain’s decision to exit the European Union. 

Certainly, the uncertainty about how Brexit will impact trade and the wider business environment in the UK is having a dampening effect on local equities, as some experts had predicted.

Most of the insurer's portfolios are run by the group's in-house fund manager, Aviva Investors, and have a heavy weighting to UK assets, though the manager does have a fixed income team in Asia. 

PRIVATE DEBT PUSH

In terms of asset classes, Aviva UK Life is expanding its private credit portfolio, with a particularly heavy focus on infrastructure, Dafria said, speaking last month at 'Managing Assets for Insurers', a forum hosted by the FT.

Private credit now accounts for a little over 40% of the UK annuities portfolio, he noted, and 40% of the private credit allocation is in infrastructure debt. The private credit allocation has grown quickly, at a annual rate of 4 to 5 percentage points in the past few years, Dafria told AsianInvestor.

Ashish Dafria, Aviva

The firm is looking for debt exposure in sectors such as energy and renewables, social infrastructure and transport, via public/private type deals in North America, he added.

Insurers and other institutions across Asia have also shown fast rising appetite for unlisted debt in the past few years, in markets from Korea to Australia. For instance, HSBC Insurance's Hong Kong CIO told AsianInvestor in March he had been adding exposure to private debt, commercial real estate loans, bank loans and infrastructure debt.

The likes of investment-grade sovereign and corporate bonds are only yielding 2% to 4% right now, said Ed Collinge, UK head of insurance at US fund house Invesco, also speaking at the FT event. But in the less liquid space, assets such as senior secured loans and direct lending offer 4% to 6%, while opportunistic/distressed credit and special situations can yield 7% to 9% or more, he noted.

Meanwhile, structured credit is a marginal but growing part of Aviva's portfolio, said Dafria. “We’ve been doing more and more structured credit, increasing the complexity premium, [through] asset-backed [transactions], equipment financing, that sort of thing.”

It makes sense to increase exposure to private credit from a risk/return perspective because of the incentives and constraints of Europe’s Solvency II regime, Dafria said.

The directive requires insurers to hold varying amounts of capital according to the perceived riskiness of assets they hold, and certain investment types, such as private equity, attract much heavier risk charges than fixed income. 

Indeed, some insurers are seemingly being put off private equity as a result of Solvency II, so there are hopes the regulator will reconsider its treatment of equities as part of a review currently under way.

HERDING CONCERNS

Dafria said he was relatively sanguine about Solvency II, seeing it simply as a constraint to take into account. But he did suggest it was causing something of a herding effect when it comes to investments. 

The framework is incentivising most insurers to pursue similar types of investment strategies in their search for greater liquidity, lower credit risk and other issues, he said.

“There’s a feeling I have that we are all drinking from the same fountain,” Dafria added. “[As for] what that implies for investment strategies and portfolios, that’s something we think about quite a bit.”

Meanwhile, other international insurance companies are rethinking their investment portfolios in response to the prevailing low-yield environment.

Take US-based property-and-casualty insurer AIG. Its CIO of international markets, Guillermo Donadini, argued that real interest rates could remain negative in developed markets for 20 years, necessitating a broad change in investment approach.