Why Infrastructure is Back on the Menu for Insurers

Solvency II concerns take a back seat as insurers seek strong returns to repair their balance sheets.

(May 30, 2013) – More evidence that insurers are putting risk back on the table: almost three-quarters of active fund managers expect them to increase their exposure to infrastructure.

Having been hit hard by falling investment returns, insurers are increasingly look to diversify their  portfolio to help increase yields, particularly after coming under pressure from shareholders for declining dividends.

Infrastructure is the asset class of choice – 71% of 191 active fund managers quizzed by ING Investment Management said they expected insurers to increase their exposure to it.

The choice of infrastructure is intriguing, given the potential capital buffers needed by European insurers for Solvency II requirements. But ING believes insurers are willing to bet the yields will be worth it.

Speaking to aiCIO, Han Rijken, head of insurance fixed income and investment strategy at ING IM, said investors were buoyed by ongoing discussions within Europe to treat infrastructure more favorably, in order to stimulate long-term funding for the sector, given banks are stepping out of the market.

“Whether infrastructure is expensive will depend on its final Solvency II treatment and the yield that can be obtained,” he said.

“As it is today, infrastructure loans will be treated as a credit. If you take the credit spread above risk free (swap) and compare this to the capital charge, infrastructure still offers an attractive return on capital. Obviously, if spreads tighten it can become unattractive, economically speaking.”

Infrastructure loans are also winning fans for being calculated on a mark-to-market model, helping to reduce asset volatility.

Insurers’ equities allocation will rise, according to ING IM’s findings, along with their exposure to emerging market securities. This echoes research from Goldman Sachs Asset Management (GSAM), which noted surprise at the speed at which insurers were flying from credit into equities.

Active investment managers told ING IM the cashflows to invest in these sectors will come from current investments in sovereign debt and corporate debt; GSAM meanwhile found high yield was being shunned in favour of bank loans, real estate, emerging market external corporates, and emerging market equities.

Australian fund manager AMP Capital has also noticed the trend, as institutions move from chasing rates of return to income generating assets.

In its most recent investor report, AMP Capital wrote that while pension funds were likely to remain cautious around real assets such as infrastructure for the time being, other institutional investors such as insurers and sovereign wealth funds were under greater pressure to perform more quickly.

Approximately one-third of AMP Capital’s respondents have 5% or less of their holdings in real assets, another third have 5-10% invested in real assets, and the remainder holds more than 10% in real assets. But 29% of all respondents in the survey anticipate increasing their allocation to alternative investments in 2013.

Related News: The New Alternatives and Infrastructure Returns – Which Factors Matter?