Aviva plan highlights European commitment to infrastructure
European insurers are accelerating their investment into infrastructure, and Aviva’s plan to more than treble its exposure to infrastructure emphasises this trend, according to Fitch Ratings.
Fitch believes European insurers will accelerate their investment in the asset class as risk charges are trimmed and investment returns across their portfolios remain low.
Aviva CEO Mark Wilson said in an interview the insurer is likely to invest around £10 billion in infrastructure over the next five years, on top of its existing £4 billion.
Fitch suggests this points to a significant acceleration for the industry, compared to a December 2013 UK government announcement that the country's six largest insurers would invest £25 billion between them over five years.
The most attracted to infrastructure assets are likely to be UK and German insurers, according to Fitch, due to their business focus on long-term guaranteed savings products, which can be well matched by the cash flow features and long duration of infrastructure debt.
“Because insurers are generally holding the assets until maturity they have less need for liquidity, particularly if they are held as part of a diverse portfolio that has liquidity elsewhere,” said Fitch.
“This means they can access the extra yield available to compensate for the lack of liquidity that limits the attractiveness for other investors.”
Furthermore, Fitch said Solvency II capital charges are also likely to be trimmed, following technical recommendations from the European Insurance and Occupational Pensions Authority (EIOPA) to the European Commission, which has developed "qualifying criteria" for infrastructure investments.
According to Fitch, this should make infrastructure more attractive from a capital efficiency perspective.
“Overall, a well-executed infrastructure investment strategy can be mildly positive for an insurer's credit profile due to benefits from asset diversification, improved matching of liabilities and higher yields,” said Fitch.
“However, it can also increase exposure to credit and political risk, especially if it is a relatively unfamiliar asset class for the insurer. For smaller firms it could also increase concentration risks if investments are large or lumpy."
