How are insurers investing and what are the most effective investment objectives out there? POINTS OF DISCUSSION • Solvency II has had marginal effect on asset allocation decision making • Insurers are seeking out good quality loans, property, infrastructure and direct lending opportunities • Insurers portfolios looking to generate higher yields in a risk controlled way • InsureTech is on the rise and here to stay

1. Insurance Asset Management, Europe 2017 7
Erik Ranberg,
Chief Investment
Officer, Gjensidige
How are insurers investing and what
are the most effective investment
objectives out there?
1.1 ROUNDTABLE DEBATE
Noel Hillmann: In each of your respective opinions, how are insurers investing and what
are the most effective investment objectives out there?
Felix Schlumpf: The largest part of insurance assets are still invested in bonds. This is given
that the liabilities of insurers also behave like bonds and the financial risk of interest rates can be
mitigated in that way.
In my opinion, the most effective investment objective is to try and achieve superior risk-
adjusted investment return, relative to liabilities. This is an economic view and it is also
encouraged by regulators.
Another interesting behavior of our liabilities is their stickiness on the balance sheet, or to put in
other words, the money the policyholders pay as premiums are with a life insurer, like ourselves,
for many years before it must be paid out. This means that we and our peers are naturally able to
invest in illiquid assets.
Erik Ranberg: To determine what the most effective strategies are, you must first differentiate
between life insurance versus non-life insurance, as they might have somewhat different balance
sheets as well as challenges in today’s environment.
As a non-life insurance company, we divide the portfolio into a hedging and a return seeking
portfolio.
In the hedge portfolio, there is focus on the duration of liabilities, as well as the inflation exposure
that we have in our liabilities. As a consequence the main part of this portfolio is fixed income.
• Solvency II has had marginal effect on asset
allocation decision making
• Insurers are seeking out good quality loans,
property, infrastructure and direct lending
opportunities
• Insurers portfolios looking to generate higher yields
in a risk controlled way
• InsureTech is on the rise and here to stay
POINTS OF DISCUSSION
Moderator
Panelists
Felix Schlumpf,
Director, Head of
Strategic Asset
Allocation, Zurich
Insurance Group
Ed Collinge,
Head of UK Insurance,
Invesco Asset
Management
Section 1 - Roundtable
Noel Hillmann,
Managing Director,
Clear Path Analysis

2. Insurance Asset Management, Europe 2017 8
Section 1 - Roundtable
In regards to the return seeking portfolio, it is not that different
today from what we have been doing for many years. However,
in today’s environment, the opportunities to establish a running
yield into that portfolio is definitely more challenging then it was a
couple of years ago.
As a consequence, we’ve taken on a higher illiquidity profile into the
portfolio, as well as more credit. However, we are very cautious to
not give away too much of our flexibility, i.e. we want to have the
opportunity to change the portfolio around if the regime were to change.
We are staying mainly with the asset classes that we have known before.
Ed Collinge: Insurance companies are looking at three key areas when
it comes to their investment strategies. First, how can they generate
more return for the same level of capital usage. This is, for example,
encouraging insurance companies to look at global diversification
across their investment grade credit portfolios.
Another area is, how can they get better returns for the capital that is
used. Certain asset classes are more capital intensive but when you are
looking at this from a capital adjusted basis under Solvency II, you get
a better return expectation. We are currently seeing a lot of insurance
companies moving into senior secured loans as well as property
investments, with both being extremely attractive asset classes under
Solvency II on a capital adjusted basis.
Finally, the very nature of insurance liabilities is that they are illiquid.
Insurers are looking at how they can access a liquidity premium.
Illiquid assets potentially enable insurers to gain a better return than is
available in the public markets.
We see insurance companies moving into loans, property,
infrastructure, direct lending and very much looking to bring out some
of this illiquidity premium.
Noel: Insurers are widely reported to be diversifying their
investment risks by investing into illiquid asset classes. What
other investment strategies are in motion for 2017 for insurers
to meet the challenges of the low yield economic environment?
Felix: Indeed, insurers are invested in illiquid asset classes like real
estate, private equity and private debt. This is not done solely to
diversify but also to earn an illiquidity premium. It is important though
to manage the illiquidity risk in order to not become a forced seller of
these illiquid assets.
Another investment strategy of increased interest to insurers is factor
investing, also known by the more popular term of “smart beta”. This
is an elegant way to add additional beta return with low correlation
to the core portfolio without increasing the market risk. The low yield
environment is indeed a challenge. One important consideration of
using a smart beta approach, is to have reasonable return expectations
and to be able to communicate them to the relevant stakeholders.
For instance, some life insurance products with guarantees are not
possible anymore in today’s low yield environment.
Erik: We have been particularly cautious, not running too much of our
portfolio assets in illiquid securities. We don’t feel that the illiquidity
premium is very onerous but at the same time, when you go for these
asset classes you are going into new knowledge areas, i.e. you must
ask yourself whether you have the expertise to manage these asset
classes, like infrastructure.
AMONGST INSURANCE
COMPANIES, WE ARE
SEEING A REALISATION
THAT THERE IS
ADDITIONAL RETURN
THAT CAN BE GAINED
FROM THEIR EQUITY
PORTFOLIOS, THAT
THERE IS SOMETHING
OTHER THAN PASSIVE
THAT ENABLES THEM
TO DO THIS: FACTOR
BASED INVESTING

3. Insurance Asset Management, Europe 2017 9
Section 1 - Roundtable
We have had quite a lot of experience with real estate and private
equity, for many years now, so illiquid investments are not new to us.
However, we haven’t pilled further into these asset classes due to their
regime, we have remained very stable.
For those who haven’t been in these asset classes, it might look as
though there are opportunities. However, you need to actually build
new and develop your existing organisational teams, to be able to
handle these asset classes.
Ed: We are seeing our insurance clients proactively move into global
credit, senior secured loans and more illiquid asset classes, such as
diversifying their property portfolios into global allocations.
Ultimately, insurance companies are looking for ways to improve their
returns in the current low yield environment but doing so in a risk
controlled way. This is best done through global diversification and
moving into these more illiquid asset classes.
Where insurance companies are investing in equities they are looking
at a much more efficient way of generating consistent, additional
returns through their equity portfolios, in a controlled way. We have
seen a big increase in appetite for factor based investing approaches
within insurance companies.
Whether it is just trying to generate, for their broader portfolios, a
little more return or they are looking at where they allocate to equities
within their surplus portfolios, using factor based techniques provides
some of the benefits of fully active management, but in a more risk
controlled way. For example, an insurer looking to reduce the swings
or potential downside experienced in equity markets may look to a low
volatility equity strategy.
Noel: Do you feel that there is a great deal of pressure on you as
a manager offering ‘active’ investment management services
to further develop your factor based models, given the ongoing
argument of passive versus active and the fees charged on
active approaches?
Ed: Invesco has a very strong factor based investing platform already
and we manage over £25 billion in factor based investing strategies.
We have also been in the market for over 20 years.
Our experience has been that more insurance investors are moving from
passiveto factor based strategies ratherthanthe otherway around.
Amongst insurance companies, we are seeing a realisation that there
is additional return that can be gained from their equity portfolios, that
there is something other than passive that enables them to do this:
factor based investing.
Noel: Erik, looking retrospectively, now that the rules have
been in place for over a year, how has Solvency II changed the
investment philosophy of insurers including yourselves?
Erik: In some ways, Solvency II has picked up the way that we’ve
always thought about investing, compared to the old regime before
Solvency II was in place. Therefore, our change in thinking has been
minimal.
Solvency II is a much more risk orientated regulation than the old
regulations that we had. We have been quite risk orientated for many
years, in how we have managed money. It is just on the margin that
Solvency II has influenced the way that we are investing.
Noel: Has Solvency II encouraged you to move into asset classes
that you may have otherwise not considered? Additionally,
have you found particular asset classes to have evolved in such
a way that they are more useful as part of the Solvency II centric
environment now?
Erik: Solvency II has not motivated us to go into any particular asset
classes and in fact, to some degree, it is actually the opposite due to
the heavy reporting requirements that it has incurred.
Noel: In regards to illiquid asset classes, do you feel that any
one in particular will perform particularly well over the next 12
months? What do you feel are the fundamental drivers of any
upward price movement?
Ed: We see significant interest from insurance companies in moving
into asset classes like infrastructure debt, commercial mortgage loans,
etc. By their very nature, these are markets where it takes several
months for transactions to be put into place.
Accessing these markets can be tricky. What you do see is that,
when there is a lot of interest from insurance companies or other
institutional investors, the spreads available on those asset classes
compress making them less attractive.
What will be interesting as we move into the Basel III regime, when
banks perhaps pull back from some of their traditional core lending
activities in, for example, infrastructure debt, is that we will see the
opportunity grow for insurance companies to allocate at attractive
prices to the area. I expect to see spread levels increase and then
become much more attractive for insurance companies over the
coming years.
Noel: Looking retrospectively, now the rules have been in
place for over a year, how has Solvency II changed investment
philosophies of insurers?
Felix: Our investment philosophy has not changed as we already use
a liability driven investment strategy, which is quite close to the rules
of Solvency II. We are subject to additional regulatory regimes, like the
Swiss solvency test. It is helpful that all these regulations are close to
an economic view, although there are minor differences between the
various regulatory regimes.

4. Insurance Asset Management, Europe 2017 10
Section 1 - Roundtable
Ed: In the run up to Solvency II, we had a fair amount of uncertainty,
even until the last few months of 2016, as to what exactly the final
regulation would be and how asset classes would be treated. Most
investment professionals time was spent looking at their existing
portfolios, how they worked under the expected Solvency II regime
and how to report on them.
The point we are at now is very exciting for insurance companies,
as well as asset managers. Solvency II is now clear and insurance
companies can proactively look at new investments and asset classes
that they haven’t invested in before.
They are also moving away from internal capabilities, so say that
you want to invest into senior secured loans and can’t manage that
yourself, then an external manager is in an excellent position to
provide that expertise to an insurer.
Noel: What do you make of the evolution in portfolio
distribution amongst insurers over the past 5 years?
Felix: The industry’s general investment portfolio distribution did
not change dramatically over recent years. It may have become a bit
riskier, since the ability to take risk increased over this time. In addition,
insurers increased their allocation to illiquid assets, which should help
in the current low yield environment.
Ed: Insurance companies invest over the medium to long term and,
given their nature, you don’t see very drastic changes in the underlying
portfolios.
Where we have seen change is with insurance companies increasing
their exposure to alternatives, investing away from domestic markets
and decreasing their exposure to inefficient asset classes under
Solvency II, such as structured credit.
Erik: All in all, the new regulations have driven our company towards a
more risk conscious attitude, to try and understand even better what
their long-term liabilities and challenges are.
These types of issues tend to come with bad timing. We are not happy
to see such a prolonged low interest rate environment because we are
locked into fairly low returns for quite a while.
Our liabilities won’t go away by themselves, so we need to do
something about it. What we have seen from other regions is that
rates can stay low for a very long time, so although no one is happy
having so much going into fixed income at these low levels, there
aren’t too many other options.
Noel: Investment in technology by insurance firms
(“insuretech”) was at a record high in 2016. Can we expect to
see more investment in technology in 2017 and will it surpass
that of last year?
Felix: Technology investment will continue to be strong, although this
is not the only way to enter the space. Collaboration and partnerships
with insurtech is an important way forward as well. Insurtech is on the
rise and here to stay.
Over the past year, we have seen many startups with no insurance
background focusing on customer experience. For example, user
friendly chatbots or new insurance products, such as pay as you
use. Going forward we will probably see more insurtech enhancing
all elements of the insurance value chain. I expect we will be using
analytics for underwriting, enhancing insurance processes, such as
claims and increasing efficiency through automation and robotics.
Ed: An interesting theme in 2016, was the increase in interest amongst
insurance companies in ESG investments and technology supporting
that trend. Incorporating ESG thinking and processes into the way
insurers invest, is a trend that we will see in the future. In the Swiss
and Nordic insurance markets, it is becoming almost a prerequisite for
asset managers to be able to provide an ESG framework around their
investment philosophy, to manage monies for insurance companies in
those regions. We expect this trend will continue across Europe over
the coming years and the technology to support it will be a critical
component for insurers and third party managers like ourselves.
Erik: You will see that we are investing into technology from two
perspectives. One is a pure financial investment and the other, into our
own firm to improve and lower the cost of operations.
It is unavoidable for our sector to not invest into technology in a
bigger way. As returns are low we need to find ways to reduce our
costs and better support investment decision making and operations.
Technology seems to be one way we can logically do so within our
organisation.
Noel: Thank you all for sharing your views on this subject.
Solvency II is now clear and insurance companies can
proactively look at new investments and asset
classes that they haven’t invested in before