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Biden's $2T Infrastructure Plan Could Boost Life Insurers' Yields

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What You Need to Know

  • The Biden proposal calls for $2 trillion in spending over the next decade.
  • Life insurers invested about $60 billion in Great Recession-era infrastructure bonds.
  • The American Council of Life Insurers said supporting infrastructure is key to strengthening the economy.

Life insurers are trying to figure out how they might fit into President Joe Biden’s new $2 trillion American Jobs Plan infrastructure proposal.

Biden wants the country to invest about 1% of gross domestic product per year in efforts to fix highways; rebuild bridges; upgrade ports, airports and transit systems; protect communities against flooding, windstorms and wildfires; strengthen the electric grid; expand access to high-speed internet service; increase energy efficiency; and support research and development programs.

Life insurers would love to find profitable new ways to invest in infrastructure, through the American Jobs Plan program or other new programs, according to Eric Richards, a partner at O’Melveny and co-chair of the law firm’s corporate department.

“Infrastructure assets are ideal,” Richards said.

Life insurers need long-lasting, steady, secure payment streams, and infrastructure projects can provide those, Richards said.

In theory, any new infrastructure bonds could pay higher rates than many other high-grade investments, at a time when life insurers are hungry for ways to increase yields on the investment portfolios they use to support life and annuity obligations.

Financing Details Are Missing

One challenge, Richards said, is that investors have no way to know now what kinds of investment opportunities the American Jobs Plan proposal might create.

“There’s no legislation that’s been drafted yet,” Richards said.

The Biden administration provided detailed descriptions of what it wants the infrastructure program to accomplish, but no details about opportunities for private-sector investors to help with financing, or about any incentives or guarantees that might be available to investors, Richards said.

The U.S. Department of Transportation would obviously have an important role in implementation, but the scope of the current outline is so broad that it looks as if most other major federal agencies also would play a role, Richards said.

“This story is going to play out over the next several months,” Richards said.

Life Insurers and Infrastructure

U.S. insurers already have more than $1 trillion invested infrastructure-related bonds, according to a 2017 insurance industry infrastructure report released by the Center for Insurance Policy and Research (CPR).

Congress created a big infrastructure bond program, the Build America Bonds program, in 2009, in response to the 2007-2009 Great Recession, to help fund “shovel ready” projects that could create many jobs.

Life insurers bought about $60 billion of the $182 billion in bonds issued with support from that program, Dirk Kempthorne told the National Association of Insurance Commissioners (NAIC) Valuation of Securities Task Force in 2016.

Kempthorne, who was the president of the ACLI in 2016, told the task force members that, as of 2016, all of the Build America Bond issuers had made all of required payments.

Life insurer investments made through the program helped pay for many projects. These include a tower used to house a cancer hospital at Ohio State University, a University of California cancer hospital in the San Francisco Bay area, and the construction of a rail line extension that will connect Dulles International Airport with a train station in East Falls Church, Virginia.

Kempthorne asked the NAIC for help with clearing regulatory hurdles, such as development of infrastructure bond valuation requirements, that might affect insurer investments in state infrastructure projects.

“Let me suggest this represents a ‘win-win-win,’” Kempthorne said. “The states win by accessing valuable capital that further stimulates economic growth. The industry wins by matching its liabilities with long-term assets. And we all win by living better lives with safer roads, trustworthy bridges and state-of-the-art care at modern hospitals.”

Richards said that he believes that, behind the scenes, money managers at life insurance companies and other institutional investors want to see Congress create a successful new infrastructure finance program because they are as interested as individual investors in supporting “environmental, social and governance” (ESG) projects.

“Ten years ago, I don’t think anybody asked about ESG,” Richards said. Since then, interest in ESG projects has evolved rapidly, he added.

ACLI Input

Susan Neely, the current president of the ACLI, said in a statement that U.S. life insurers believe that supporting the nation’s infrastructure is the key to restoring and rebuilding the economy for all Americans.

“We support policy initiatives that focus on broad economic growth, as well as investments at the local level, including underserved communities, through direct payment bonds,” Neely said in the statement. “We also support the effort to address affordable housing needs through the Low-Income Housing Tax Credit (LIHTC) program. … We’ve been part of American life for generations, providing good jobs for workers.”

Life insurers  invested about $5 billion in 2019 in the LIHTC program, Neely said.

She also mentioned life insurers’ role in supporting the Build America Bonds program.

“Investments like this help us keep our long-term guaranteed promises to our consumers and will continue to help with the nation’s economic recovery,” Neely said. “As investors who will play a critical role in the recovery ahead and as financial security providers to families, we believe a bipartisan approach to an infrastructure policy will be an important step in the nation’s economic recovery.”

Of the Biden proposal itself, Neely said, “We look forward to fully reviewing the proposal and contributing to the national discussion on rebuilding the nation’s economy in all communities and helping families financially.”

Potential Obstacles

One major obstacle will be the need for the Biden administration to get any part of the infrastructure plan approved by Congress.

If the current proposal was enacted and implemented as written, insurers would face the challenge that many infrastructure projects are complicated and difficult to value, according to Dimitris Karapiperis, the author of the 2017 CIPR report on insurers and infrastructure investments.

“A detailed and deep understanding of infrastructure financing and contractual structure, as well as knowledge of sophisticated analytical approaches, are need to fully assess the risk-return profile of each specific infrastructure project,” Karapiperis said.

The NAIC’s Valuation of Securities and Task Force and the NAIC’s Securities Valuation Office have developing new methodologies for evaluating infrastructure investments, such as power generation investments.

Richards said one way life insurers can reduce some of the complexity involved with investing in infrastructure projects is to invest in a fund created by a private equity firm or other company that’s experienced with managing infrastructure project investments, rather than by investing directly in the projects.

(Image: SP-Photo/Shutterstock)


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