Ashish Dafria: Every year feels a bit unprecedented now with the new sets of challenges – especially around risk assets and risk markets. However, we have had, and continue to have, a really strong performance.
"2024 is an election year for two billion people, so we’re asking:
what does that mean by way of policy risk and policy agendas?"
Thinking about what this means is a big topic. Credit spreads are at the level where we are buying return free risk, and the implications of that from a portfolio perspective mean we have a big question to cover.
2024 is an election year for two billion plus people, so we’re asking: what does that mean by way of policy risk and policy agendas? Those are the big asset allocation topics that we are grappling with now.
On the asset class question, especially for the type of investments we do in our annuity portfolio – which are long duration, fixed interest, fixed income-type investment – the move towards secured, sustainable, private investments, such as infrastructure, and structured investments remains attractive too.
Ashish: That path of inflation going hand-in-hand with interest rates is a trillion-dollar question.
The approach we take is that we are not forecasters. I don't believe anyone is – instead, our approach is based on how we prepare for different scenarios.
From an investment and asset perspective, we do like assets with inflation sensitivity. It's attractive for a lot of reasons; it's a natural hedge for inflation-sensitive liabilities that we have, and it's an attractive way of mitigating the impact of the high inflation regime.
"It's a cash flow matching exercise, which immunises us
largely from the interest rate, per se."
At least on the investment side, we don't necessarily take direct interest rate risk; we do cash flow-based investing. It's a cash flow matching exercise, which immunises us largely from the interest rate, per se.
It's the second-order impacts of higher interest rates that are of greater importance to us. We look at what it means for the borrowers of our mortgage portfolio; can they refinance? Do we see strength, or do we need to switch to different sectors, different borrowers, different asset classes?
Ashish: We’re not making a political statement, but we have a strong and constructive dialogue with key decision-makers and participants across the political spectrum on some of the key issues that impact our customers – whether it’s the cost-of-living crisis, the case around investing in the UK, or how we plug the gap in retirement funding.
"Part of that reform is centred around how we can
enable greater investment in the UK."
Those questions are pertinent to us, and we find broad support from stakeholders in ways to enable solutions. We were one of the early launchers of the long-term asset fund (LTAFs) that got designed, we are signatories to the Mansion House Compact, and we also have a strong ongoing dialogue on the Solvency UK reform.
Part of that reform is centred around how we can enable greater investment in the UK.
By the very nature of who we are as a large UK insurer, we view it both as the right and opportune thing to do. We have an opportunity to make investments in the UK economy. That's what you would find our investments to be.
We’ve made significant investments in the last year – £500 million in renewable power off the coast of the North Sea, £200 million in health care facilities, street lighting, Private Finance Initiatives (PFI), and any variety of investments in the UK economy, and sustainable, attractive, and beneficial to our policyholders.
Ashish: There is a variety – there was another centred around smart metre rollout – so it depends on the opportunity. Often, it’s private developer-led with involvement or participation or coordination with either the local council or the public body.
Ashish: It’s been a topic of debate and activity at the policy and industry levels.
The examples I mentioned – the launches of LTAFs, for example – were partly designed for that purpose. In the Mansion House Compact announcement, we saw a similar spirit in terms of incentivising more investment in the UK.
We do need to recognise that the UK is in a competitive market for investment, and you wouldn't want to make investments that deliver inappropriate and inadequate risk-return to UK pensioners and savers.
My personal view is that I remain quite optimistic about the UK’s prospects. There is a degree of first principles in these issues; if you get attractive prospects, which I believe they are and will be, then investments will follow.
Ashish: In all of these technologies, there are well-established biases – for one, we are likely to overhype the near-term impact but underappreciate the long-term – and I suspect it is the case for AI as well.
What is emerging is so rapid that what you thought the scope and your strategy was two months ago will be outdated and need tweaking in another two months. We are still at the risk of underestimating AI; it is a meaningful and profound change.
As a company that invests in the US – and even if you invest in the passive index fund in the US – we are starting to see the theme of AI as a big portfolio question. We see a lot of opportunities where companies can transform their growth and/or profitability by leveraging AI, which is slightly outside of the hype but could be quite attractive.
"AI is not yet dominant and still not quite as visible in individual investment,
but you can see it starting to come through."
As an insurer, we have in many ways been digesters and users of AI long before it was being publicised. We do insurance underwriting, which is all about risk selection and risk modelling, and how you take different inputs and create an intelligent program at the back of it to help with that underlining.
For a long time, we have had a data science practice and a data university in Aviva, which has been turbo-charged and reframed into how we benefit from generative AI.
There’s much more to come. AI is not yet dominant and still not quite as visible in individual investment, but you can see it starting to come through.
