Aviva, one of the UK’s largest insurance groups, plans to use shareholder money to fund early-stage infrastructure projects, marking a step change in its domestic investment efforts and mimicking the approach of rival Legal & General.
Chief executive Amanda Blanc, a supporter of insurers using their financial firepower to invest in social infrastructure and climate-friendly projects, shared the plan in an interview with the Financial Times.
” We watch [whether] we are investing our shareholders’ money as well as our policyholders’ money in some of these infrastructure investments in the early stages,” she said.
This would mean using only shareholder funds initially, for example when a construction project is in its pre-planning phase. Then, when the projects materialize and the risks have reduced, “you can move them from one part of your balance sheet to another,” Blanc added.
Although the plan is still in its infancy, a first deal could be concluded as early as this year, according to a person close to the group’s thinking. Targeted investments would have a social objective, such as construction in disadvantaged areas or the fight against climate change.
A small group-level team would select the projects, the person said, with some ideas fed by Aviva’s investment arm, Aviva Investors. The division is already in the middle of a three-year plan to divert £10bn into UK infrastructure and property.
L&G, which has developed its approach over the years, now has a stand-alone division that invests from its own balance sheet in housing, specialist commercial real estate and other areas such as start-up financing.
That division, L&G Capital, announced its first U.S. investment in May, committing $500 million in a real estate finance partnership in the life sciences and technology sectors.
Assets created by L&G Capital can be transferred into the group’s pension business, where they are used to support pension promises, or into the asset management business, managing them for third-party investors.
Insurance executives said the right regulatory changes could further encourage these moves. The UK government wants changes to the Solvency II regulatory regime, currently under consultation, to unlock billions for investment in the real economy.
But the industry has raised fears that even with a planned reduction in a key capital cushion, changes to other parts of the rules could constrain insurers and impact how much they can invest in long-lived assets. such as infrastructure.
“If it happens in the way that has been described, it will not bring the expected benefit to UK infrastructure investment in the short to medium term, period,” Blanc told the FT. “This will not be the case.”
The main battleground for reform is the so-called equalizing adjustment, which gives insurers a solvency boost if they use certain long-lived assets to meet their liabilities. The prudential regulator warned that, as currently constructed, the adjustment does not adequately reflect credit risks.
But insurers have said changes to address the issue would be capital punitive and make the UK less competitive than the EU, which has proposed its own Solvency II reforms.
On his last day as chief executive of the Association of British Insurers in December, Huw Evans warned that such a change to the equalizing adjustment would mean “any chance of a significant boost to green investments”. [would] almost certainly be lost”.
The Prudential Regulatory Authority said in April that “the broader reform package enabled by putting the [matching adjustment] on a sound basis would facilitate investment in long-term productive assets”.