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* Pressure to keep investment returns above 3 percent
* Diversification is at early stage; small part ofportfolios
* Loan moves could offset part of banks' deleveraging
By Christian Plumb
PARIS, Feb 7 (Reuters) - European insurers and assetmanagers are taking on more risk to boost investment returns bylending to big-ticket infrastructure projects, companies andproperty developers where banks might no longer be able toprovide.
The diversification, starting from a small base, stretchesfrom France, where BNP Paribas Investment Partners recently launched its third corporate debt fund for insurers ina year, to northern Europe, where Swiss Re is toinvest $500 million in senior debt issued by northern European infrastructure projects.
In the UK Legal & General's asset management arm completed a 121 million-pound ($190 million) loan deal last yearwith student housing specialist Unite Group, while in FranceEurope's second-biggest insurer AXA is now teaming up withSociete Generale to lend to small- to mid-sizedcompanies.
"We are re-opening some boxes that have been closed since2008 in the crisis," said Laurent Clamagirand, who oversees a500 billion euro ($676 billion) portfolio as AXA's chiefinvestment officer. "The frontier of our risk appetite hasconstantly evolved."
Over time AXA is likely to boost investments in corporate,infrastructure and other types of debt to between 10 and 20percent of its 40 billion euros of yearly investments from allbut zero as recently as five years ago.
Life insurers' diversification into lending reflects thepressure to maintain returns in markets such as France above 3 percent, even as yields on many securities have dipped far belowthat, to match longer term commitments on some of theirpolicies, especially those carrying guarantees on returns.
With banks cutting back on lending to meet the bankingindustry's Basel III rules on capital adequacy rules, theinsurers could step in at the margins to meet some of the demandfor credit.
But moving into lending is risky. The assets underlying theloans are less liquid and harder to analyse than the sovereignand corporate bonds which are the traditional mainstay ofinsurers' investments.
"I think it's fair to say that we are concerned that allinsurance companies do not necessarily have the expertise toinvest in these asset classes and as such they may be left withthe lowest quality assets," said Benjamin Serra, a Paris-basedfinancial institutions analyst at credit ratings agency Moody's.
However, the approach of new Solvency II capital adequacyrules for European Union insurers aimed at reducing the risks offailure for policyholders may be contributing to the shift intoless-liquid but potentially higher-yielding assets.
In preparation for the Solvency II regime many insurers havealready moved out of share investments in favour of corporatebonds and other fixed income assets. But the increased demandfrom insurers and others has already pushed yields on suchassets lower, forcing insurers to look for higher returns inother areas.
At the same time, a delay in the implementation of SolvencyII has slipped until 2016 or 2017, with many insurers lobbyingto loosen its treatment of investments such as infrastructureloans, with politicians eager not to kill an emerging source ofcredit at a time when banks are clamping down on lending.
"WE'RE NOT A BANK"
Typically the French unit of Europe's largest insurerAllianz, which has an 80 billion-euro fund as part ofits parent's 400 billion-euro portfolio, is taking a tentativeapproach, at least with regard to corporate loans.
At the same time it has been increasing its bet on areaslike commercial real estate where some recent loans are yielding1.5 to 2 percentage points more than the equivalent Frenchsovereign bonds. Allianz's French unit made 450 million euros ofsuch loans last year and expects more in 2013.
"I think you can lose a lot of money lending to the wrongperson," said Peter Etzenbach, chief investment officer forAllianz France. "We're not a bank, we don't ever want to be abank, so we need to find a way where we feel comfortable withthe risks we take."
Another potential area is infrastructure lending, where thegroup has hired a team to vet investments and expects toannounce its first deal in 2013.
"The volumes could be significant," he said. "We couldeasily, just the French balance sheet, have a billion of it in agiven year."
Insurers and fund managers say the risks are capped becausethe investments are proportionately small and because theirlong-term nature matches their long-term payout obligations evenif such investments are frequently illiquid.
"Such products are less liquid than stocks and bonds andthere is no obligation to mark to market, which is to insurers'advantage," said Philippe Forni, chief executive of Camgestion,a fund manager which works with BNP Paribas Investment Partnersin managing insurers' portfolios.
"Even so, the risk that I see is that if all insurers try toadopt this kind of approach at the same time, there's the riskof a bubble."
BUZZ
BNP Paribas's asset management arm has created threedifferent funds targeted at insurers seeking access to corporatedebt as an asset class and is also working on a dedicatedmandate for a big European insurer.
The team has boosted assets under management by 700 millioneuros to 1.7 billion, with another fund just gearing up andlikely to raise over 100 million investing in both European andU.S. loans on behalf of insurers in countries including Belgium,Italy and Switzerland.
"What our insurance clients tell us is that there is anenormous amount of buzz right now (around alternativeinvestments)," said Anne Dille-Weibel, head of institutionalsales, banks and insurance, at BNP Paribas Investment Partners.
