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Infrastructure Investments

Last Updated 3/2/20

Issue:  “Infrastructure” encompasses projects long financed by governments and private projects long financed by banks. Government financed infrastructure projects are subject to known legal, financing and regulatory paradigms, while private infrastructure is subject to privately developed arrangements. An insurer can get infrastructure exposure by buying municipal bonds or bank loans. However, if an insurer wants to invest in a project directly, it must find the project since there is no market mechanism providing the type of information typically offered. Information used generally includes available investments, credit risk of the projects, documentation standards and pricing.

Infrastructure has two additional important characteristics. One is that the project must be built before cash flow for repayment exists. The other is that infrastructure projects are large scale, regional/national, complex and individually unique. This all means infrastructure projects require significant time and resources to find and study before risks and potential rewards can be understood. U.S. insurance companies have participated in infrastructure investments as the long-dated terms match well with the long duration of their liabilities. They, however, have not been a leading provider of capital for infrastructure projects to date.

Background: Several factors have contributed to insurers’ interest in direct investments in infrastructure. New bank regulations are likely to cause banks to significantly decrease infrastructure lending while government infrastructure funding is facing significant political headwinds. At the same time, infrastructure projects are ideal investments for an insurer: they lead to long lived assets; generate predictable revenue over their life and are highly illiquid, providing a better return and reducing reinvestment risk. Each stage of an infrastructure project (i.e., planning and design, approval and construction, operation and then maintenance) involves different risks and attracts investors that seek that risk. It isn’t clear if insurers want or need new regulatory paradigms to have exposures to the different project stage risk profiles or if they want a paradigm where they could invest in all the stages of a given project.

Status: Insurance companies already invest indirectly in infrastructure through bonds. While direct investment in infrastructure provides several advantages, it also requires a unique analytical construct. In 2017, the NAIC Securities Valuation Office (SVO) worked with the American Council of Life Insurers (ACLI) to create transparency standards, analytical criteria, and methodology for power generation and renewable energy projects. It also continues to be involved in several related initiatives. Additionally, the NAIC Valuation of Securities (E) Task Force evaluates potential impediments to insurer investment in infrastructure. Although no impediments have yet been identified, the Task Force stands ready to address concerns as they arise

In 2019, the NAIC’s Center for Insurance Policy and Research (CIPR) and Capital Markets Bureau are collaborating on an infrastructure study for the insurance industry. The purpose of the study is to develop a better understanding of infrastructure investments and the dynamics of that market as it relates to the U.S. insurance industry as an institutional investor. A request for information was released at the Summer 2019 National Meeting to gather information and input from market participants on key topics such as the definition of infrastructure, the market size for infrastructure assets, the historical credit performance of infrastructure investments, and the treatment of infrastructure investments by state insurance regulators. The study, which is expected to be released in the spring of 2020, will cover two key overarching topics: infrastructure investment as an asset class and the insurance industry’s participation in the infrastructure market, including barriers and opportunities.