Last Updated: 1/31/2024

Issue: Infrastructure is the permanent facilities and structures that a society requires to facilitate the orderly operation of its economy. There is a huge funding gap between what is required to support infrastructure going forward and what is available in the U.S. as well as all over the world. As of 2021, in the United States, the funding gap is estimated to be about $2.59 trillion over 10 years, at the same time, simply updating and maintain existing infrastructure networks and systems would require another $1 trillion. Traditionally, municipal bonds and private activity bonds (PABs) have been the primary source of financing infrastructure. Besides, opportunities to invest in infrastructure also includes private debt, public and private equity, and direct investment.

Infrastructure projects are asset-intensive and generate predictable and stable cash flows over the long term, which provide a natural match for insurers’ liabilities-driven investment strategies and prevent economic capital erosion arising from duration mismatch particularly in a low interest rate environment. Since infrastructure investment can offer portfolio diversification, low-risk and competitive returns over long timeline, institutional investors, such as insurance companies, pension funds, etc., are increasingly seeing this as a viable and distinct asset class. However, the resilient and credit performance of infrastructure has not been reflected in the standard approaches for the credit risk in most regulatory frameworks.

Background: Insurance companies have long been a significant presence in infrastructure financing. As of Dec. 31, 2019 U.S. insurers hold approximately $9 billion in U.S. securities ($1 billion in preferred stock), $144 billion of municipal revenue bonds, and $413 billion of corporate bonds in the following infrastructure sectors: utilities; natural resources; communications; transportation; social infrastructure and power generation. New bank regulations are likely to cause banks to significantly decrease infrastructure lending while government infrastructure funding is facing significant political headwinds, encouraging a more efficient allocation of capital by shifting the supply of long-term funding ton insurers. However, we have also heard that there are impediments (i.e. regulatory, procedural, etc.) in the insurance industry from being more active in this asset class.

Status: In 2017, the NAIC Securities Valuation Office (SVO) worked with the American Council of Life Insurers (ACLI) to create transparency in the analytical criteria, and methodology for power generation and renewable energy projects. It also continues to be involved in several related initiatives. SVO assess the infrastructure project’s risk by 1) evaluating the project’s cash flows over the tenor of the notes to determine their composition and predictability; 2) analyzing the project’s competitive position within the market of operation and any offtake agreements in place; 3) assessing the project’s technology and operating risks; and 4) considering the project’s financial profile through a review of its key financial metrics (debt service coverage ratio or net present value of cash flow to debt), its liquidity and reserve accounts, and the overall transaction structure including the existence of refinancing risk and structural subordination. Additionally, the NAIC Valuation of Securities (E) Task Force evaluates potential impediments to insurer investment in infrastructure.

In 2019, the NAIC’s Center for Insurance Policy and Research (CIPR) and Capital Markets Bureau collaborated on an infrastructure study for the insurance industry. The findings of the study suggests that the insurance sector can help to fill the infrastructure gap. The study shows that infrastructure investments have many qualities that should be appealing to insurers, including long duration, mostly stable and secure cash flows, attractive risk-adjusted returns, and low correlation to other asset classes. Further, (additional) infrastructure investments may lead to a more diversified investment portfolio, particularly if the investment is outside of the fossil fuel energy sector, which we show to be the overwhelmingly dominant sector for insurance industry infrastructure investments. Moreover, the study shows that infrastructure bonds, from any perspective, have substantially better credit performance than non-financial corporate bonds more generally.

Various insurance industry representatives believe the risk-based capital (RBC) treatment of infrastructure investments should be revised to more accurately reflect better credit performance for debt issues and more stable cash flows and less volatile project valuations than other equity investments.