With an expected $500 billion per year gap in infrastructure funding through 2030, insurers are well situated to fill that financing void, Standard & Poor’s asserted in a July 7 note.
The ratings agency said that governments and banks will remain “the dominant investors” in infrastructure programs but that insurers—particularly life insurers looking to find good investments to counter low interest rates—are poised to make up the difference.
At the same time, S&P noted that the practice already has gained ground beyond life insurers. French insurance group AXA, Allianz SE and Munich Re Group have all committed sizable investments to infrastructure, and AG Insurance, CNP Assurances and QBE Insurance have disclosed plans to shift substantially more investment money toward infrastructure, the rating agency said.
Here’s another mark of the investment trend: Assured Guaranty (Europe) Ltd, a bond insurer, has already wrapped nearly $131.9 million of U.K. infrastructure bonds so far in 2014, S&P said, versus more than $407.6 million in 2013.
“With government bond yields at low levels in developed markets, the search for yield to mitigate declining investment spreads and deliver competitive policyholder returns has caused insurers worldwide to seek alternative investments,” S&P said in its note.
At the same time, there are risks, S&P said.
“Diversifying into infrastructure investments requires specialist knowledge, of which insurers have relatively little experience, in our opinion,” S&P said. “The risks involved in infrastructure projects include construction and technical and design failures, which are unfamiliar to the majority of insurers. Meanwhile, potential investors cite a lack of industry data as a deterrent to funding infrastructure projects.”
With that in mind, S&P said it sees larger insurers with specialist teams of investment professionals as being “more inclined to invest in infrastructure directly through private equity and loan structures, compared with smaller insurers that are more likely to participate through bonds and shares in investment funds.”