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Infrastructure Investments Help Power Clients' Annuities

By Allison Bell

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What You Need to Know

  • Life insurers have already invested about $1 trillion of their $8.7 trillion in assets in infrastructure.
  • Two new federal laws could boost infrastructure projects.
  • Institutional asset managers have been talking about infrastructure during their latest earnings calls.

Efforts by the administration of President Joe Biden to support investments in infrastructure could quietly shape the investment portfolios backing your clients’ life insurance policies and annuity contracts.

Biden talked about infrastructure investment efforts Tuesday, during his State of the Union address.

Ed Chanda, national sector lead for insurance at KPMG, said the new efforts could increase life insurers’ interest in infrastructure-related assets.

“Life insurers have always been a significant investor in infrastructure, and, with recent increased funding from the federal level in infrastructure projects, there exists more opportunities for insurers today than in recent years,” Chanda said in an interview.

What It Means

Clients who like the idea of investing in bridges, windmills and solar power projects may find that they already are doing so, through their life insurance policies and annuity contracts.

The Backdrop

Infrastructure-related investments might account for about $1 trillion of U.S. life insurers’ $8.7 trillion in assets, according to investment data from the National Association of Insurance Commissioners and asset data from the American Council of Life Insurers.

TIAA estimated in 2018 that the United States would have a 10-year infrastructure funding gap of $2.6 trillion.

Two new federal laws — the Infrastructure Investment and Jobs Act and the Inflation Reduction Act — include tax breaks and other provisions designed to help communities pay for infrastructure projects.

Institutional investors are eager to invest in infrastructure projects.

Executives from Blackstone, Brookfield Asset Management and KKR — companies with large life insurance company asset management businesses — have all talked about strong infrastructure investment cash inflows in the past two weeks, during conference calls with securities analysts. The companies held the calls to discuss their earnings for the fourth quarter of 2022.

Blackstone, for example, reported that the company’s 5-year-old infrastructure investment business now has $35 billion in assets under management, and that it attracted $10 billion of those assets in 2022.

Jonathan Gray, the president of Blackstone, said one major driver is investors’ concerns about inflation and an increased appreciation for inflation-protected hard assets.

“And, in general, I would say, our customers are under-allocated to infrastructure and want to hold more here,” Gray said.

Biden’s SOTU Address

Biden devoted much of his State of the Union address to talking about the future impact of the two new infrastructure funding laws.

“To maintain the strongest economy in the world, we also need the best infrastructure in the world, then we fell to 13th,” Biden said.

The new infrastructure law has already helped fund about 20,000 projects, and the Inflation Reduction Act will promote investments in clean energy, he added.

Chanda’s Views

Chanda said KPMG is seeing life insurers show strong interest in infrastructure projects, and especially in projects with social and environmental benefits, such as projects that help reduce countries’ reliance on coal and gasoline and increase use of renewable sources of energy, such as solar power and windmills.

State insurance regulators have complicated rules for counting assets in life insurers’ capital totals.

Regulators typically classify federal government bonds and high-grade corporate bonds as the safest investments and let life insurers include the full value of those assets in capital calculations.

Regulators require insurers to apply “capital risk charges,” or reductions in asset value, when including riskier assets in capital calculations.

Chanda said that, when life insurers invest in infrastructure projects, the following concerns could come up:

  • The admissibility of the investments.
  • The capital risk charges to be imposed on the investments.
  • The duration of the investments, and whether the durations match the durations of an insurer’s own liabilities.
  • Limits on how much of an insurer’s assets can go into any one investment.

 (Image: Adobe Stock)

Allison Bell

Think_Allison

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