By Hamlin Lovell, NordicInvestor

This article is a part of our 2021 Nordic Insurance Report. The full report can be found here

Afa Insurance is a non-profit making organization that provides collective insurance for workplace injuries and long-term illness for almost 5 million Swedish workers, most part of the Swedish working population, but does not market any products. It is funded by trade unions and employers but has not charged any premiums for the past 17 years thanks to declining liabilities and strong investment returns. The firm manages SEK 240 billion (USD 28 billion), for its 3 insurance companies and a small number of external foundations. Nordic Investor interviewed Chief Investment Officer, Johan Held.

The Pandemic: Remote Working, Volatility and New Manager Engagement

Remote working was efficient but sacrificed dialogue with both colleagues and new managers

“Initially it was difficult to work remotely, but with digital meetings and channels we now have the flexibility to work from home even after Covid. We have a very broad access to interesting topics and speakers working from a distance even without physical meetings”.

“The disadvantage is that we lack the natural interaction and dialogue between colleagues, an aspect which is important for the work atmosphere and for maintaining a strong team spirit. It would become problem if we missed out on this dialogue for years to come”.

“We did not see any delay or disruption to our decision making, because the governance structure and investment guidelines delegates large part of the asset management responsibility to the asset management division and leaves us with ample room to maneuver. Apart from adapting to remote working technology, it has been more or less business as usual”.

“It is however harder to reach out to new external managers, and we do insist on meeting with new managers before committing large sums of money. Furthermore, physical meetings helps building strong relationships”.

“Market volatility did not change our governance framework, which is very robust to start with. The extreme volatility lasted only a quarter or so, and the actual asset allocation of asset classes can deviate quite considerably from our strategic benchmarks. Given our strong solvency we can withstand a big market downturn without becoming forced sellers of risk assets. Though the origin of the current crisis was completely different from anything we have experienced in the past, you never know when the next crisis may occur but we are always trying to be prepared for it”.

A Lower for Longer World

“As interest rates have continued to decline over many years we have shortened the duration of our fixed income portfolio, from about 4 to 2 years, as we do not see interest rates falling any further from here. Hence with a longer duration on our liabilities than our fixed income portfolio we are positioned for increasing interest rates”.

Strategic Asset Allocation

“Over the past 10 + years we have steadily been reducing our share of fixed income investments, from around 60% to about 40% of total assets, and have added to illiquid investments, primarily in alternatives such as private equity, private debt, infrastructure and direct property. In total we have about 30% invested in illiquids”.

(Our interview with AFA’s Head of Alternative Investments, Mikael Huldt, provides more detail on the illiquid allocations here)

Corporate Credit Risk

“Given the backdrop of low interest rates for longer, we are not really worried about corporate defaults in the short term. Longer term we will likely see an upturn in the defaults cycle. However, in private debt we are quite cautiously positioned mainly in senior debt because we believed the credit cycle was long in the tooth even before the pandemic struck us. Although we do have some risk in our US high yield portfolio our fixed income portfolio in general has limited corporate exposure”.

Tactical Asset Allocation

“Our tactical asset allocation mainly involves switching between the more liquid asset classes of fixed income and listed equities”.

Liquidity and Cash Management

“Coupons on bonds, dividends, rents and cashflow from alternatives provide some liquidity but we need to keep sufficient amount of cash and liquid fixed income securities as well because we regularly have to pay out about SEK 10 billion per year in insurance claims and insurance premias are close to zero. We have been able to manage with negative yields on cash and fixed income and our overall returns from fixed income have been positive every year so far”.

In House versus External Management

“Most of our fixed income portfolio is actively managed in-house, against an internal benchmark of Swedish, German and US bonds with a strong focus on mortgage bonds and government bonds. We outsource areas such as US High Yield, where we do not have sufficient in-house expertise. Regarding equities the majority is managed in-house but we outsource Asian and EM equities”.

Active versus Passive Management

“Equities are passively managed in Japan and actively in the rest of Asia.

For the US and Europe we adopt an enhanced index strategy while Sweden is actively managed ”.

“Emerging markets uses a mix of active and passive strategies. This has not changed much lately but historically we had more active management”.



“We have been applying negative screening regarding equities for many years now, initially excluding tobacco already 25 years ago”.

“ESG applies to all asset. We scrutinize external managers’ ESG policies before investing in their funds but cannot make bespoke arrangements since we normally do not invest in segregated mandates. We are however seeking look through transparency for ESG reporting from managers”.

“Since we mainly invest in sovereign, agency and mortgage bonds in the US, Germany and Sweden, ESG is not much of an issue in this area. We are not invested in emerging market debt”.


“Having spent many years following the recommendations of the UN PRI, we actually became a signatory during last year in order to demonstrate our ESG-commitment and we sent in our very first report in April 2021”.

“Naturally we adhere to international conventions like UN Global Ciompact and OECD´s guidelines for human rights labour rights, environment etc. Apart from tobacco we also apply exclusion criteria regarding companies engaged in oil sand, combustion coal, gambling and pornography.

“We are now reviewing whether to switch to ESG benchmarks and we are also working on improving our positive screening process”.

“ESG is a moving target. We need to look very carefully at the risk of rapidly changing valuations and assets becoming stranded due to mounting ESG concerns”.


“One major challenge of ESG is subjectivity. Everyone has their own definition of its content and we cannot be sure what is right or what is wrong. The EU is trying to find one size fits all definitions, which is very delicate when there are so many different reporting guidelines, demands and initiatives. We recently decided to recruit an ESG-specialist to work full time on sustainable investments helping out with reporting, regulations and to further develop our ESG skills”.

“We will learn how to cope with all new regulation in this area. Eventually we will succeed just as we managed to adapt to the stringent Solvency II reporting regime but the challenge is how to move smoothly”.

The SFDR is not applicable for Afa Insurance currently since we do not market and distribute investment products”.

Solvency II Framework and Reforms

AFA is not like most other risk insurance companies nor is it a pension company, but since 2016 the Swedish financial regulator has required it to be covered by Solvency II. “One important result is a higher capital charge than would apply under the pension directive. There would be other advantages as well with transforming the company to become an occupational pension company. Hence, this is something our board of directors is contemplating currently which means that there is a distinct possibility that we may be regulated under IOPR2 at some stage”.

Cumbersome reporting requirements that change too often.

“Solvency II involves complicated, detailed and cumbersome reporting. Material changes are understandable but frequent small changes are made, sometimes seemingly without considering the costs for the industry. We have both permanent staff and consultants who work full time with Solvency II reporting. My personal feeling is that EIOPA is too dominant, and that national regulators like the Swedish FSA, have too little influencing in tailoring the framework to local needs. There are too many small changes and we would prefer a more stable and predictable framework”.


“The economy is clearly now out of recession with huge stimulus packages worldwide and very supportive central banks. It remains to be seen how the economy adapts to higher debt levels and potentially increasing inflation and interest rates. All risk assets are very highly valued, and a new regime could lead to big challenges for the whole industry”.