In response to the low yield environment and the introduction of risk-based capital regimes, insurers have diversified their portfolios - especially into private markets and longer-duration assets.
But one downside of the move into less liquid asset classes is the risk that an urgent cash call will mean having to exit investments with a big loss. It is this challenge that Aviva Investors has been innovative in finding solutions to.
"More recently, insurers have been very focused on liquidity management. This is an essential consideration when investing in private assets - insurers need to quantify what proportion of their investment portfolio can be invested in less liquid assets and over what period," says Iain Forrester, head of insurance investment strategy at Aviva Investors. To help insurers diversify their investment portfolios, the firm's structured finance team has an innovative approach to monitor the illiquidity premia available not traded on public markets. The team, which originated more than £1bn ($1.2bn) of assets in 2017, includes specialist private markets practitioners such as Forrester and Munawer Shafi, head of structured finance.
The Insurance Asset Risk Awards judges commended Aviva Investors for a "nice range of case studies". One deal involved supporting more than 60 individual private finance initiative (PFI) transactions when the firm acquired a portfolio of interest rate and inflation swaps from a UK bank, valued at around £400m.
Significant collaboration, structuring and hedging design were required to optimise the transaction under the Solvency II matching adjustment requirements.
Each individual PFI deal was subject to Aviva Investors' investment committee, which led to a small number of deals being rejected in the bundled transaction but resulted in a sizeable illiquidity premium in a familiar but complex asset class.
Another case involved extending commercial real estate finance, where Aviva Investors provided an additional £45m to an existing £79m debt facility expiring in December 2024 to a UK-listed developer with a portfolio valued in excess of £1bn.
The new facility was structured into fixed and floating rate tranches, providing additional flexibility to the borrower on repayment, and was funded from multiple mandates managed by Aviva Investors.