Why Clean Energy Infrastructure Is a Smart Investment for Life Insurers
Why Clean Energy Infrastructure Makes Sense for Life Insurers
For life insurers managing long-term liabilities, identifying investments that provide both strong returns and duration alignment can be a complex task. Renewable energy infrastructure offers a compelling solution to this challenge.
The market for these investments is rapidly expanding. According to the International Energy Agency, global investment in clean energy last year nearly doubled that in fossil fuels. A growing share of this capital is coming from private sources, which can tailor investment structures to meet the specific needs of insurers.
These infrastructure assets often carry investment-grade ratings, making them attractive from a capital-efficiency and yield perspective. With durations often extending to 20 years, they are well suited to match insurers’ long-term obligations.
Key Advantages for Insurers Include:
For life insurers managing long-term liabilities, identifying investments that provide both strong returns and duration alignment can be a complex task. Renewable energy infrastructure offers a compelling solution to this challenge.
The market for these investments is rapidly expanding. According to the International Energy Agency, global investment in clean energy last year nearly doubled that in fossil fuels. A growing share of this capital is coming from private sources, which can tailor investment structures to meet the specific needs of insurers.
These infrastructure assets often carry investment-grade ratings, making them attractive from a capital-efficiency and yield perspective. With durations often extending to 20 years, they are well suited to match insurers’ long-term obligations.
Key Advantages for Insurers Include:
- Attractive Return Profiles: These assets frequently sit at the lower end of the investment-grade spectrum, offering wider credit spreads and higher returns compared to similar-rated instruments like government or corporate bonds. The illiquidity premium also adds to the potential yield.
- Portfolio Diversification: Due to their typically low correlation with other long-duration assets, renewable infrastructure investments can help insurers improve diversification across their portfolios.
- Capital Efficiency: Some types of renewable infrastructure—particularly in European markets—can qualify for lower capital charges, improving capital efficiency under certain regulatory frameworks.
- Low Default Risk: Historically, private infrastructure investments have shown lower default rates than comparable public corporate bonds issued by non-financial entities.
While banks have traditionally financed these projects, their role has diminished due to larger project sizes and constrained balance sheets. This shift has opened the door for private lenders to assemble diversified portfolios—such as collections of community solar projects backed by investment-grade counterparties—that help reduce exposure to individual assets.
Private credit also brings greater structuring flexibility, offering tailored solutions that match insurers’ longer investment horizons. This has helped create more consistent funding streams for project developers who might otherwise rely on short-term bank lending.
The U.S. Market: A Standout Opportunity
Currently, the U.S. presents the broadest range of attractive options for both domestic and European insurers. Renewable energy has become the fastest-growing and most cost-effective power source in the country, with the scale of the U.S. market providing ample investment choices.
Although Europe has made considerable progress in adopting renewables—solar and wind have surpassed fossil fuels in many areas—there are fewer insurance-suitable assets available with the necessary investment-grade credit ratings and structural features.
Managing Tariff and Policy Risks
Recent U.S. tariffs on certain imports may affect upcoming projects, particularly those relying on foreign equipment. However, with solar panel production increasingly diversified beyond China, the impact of tariffs has been softened. Additionally, many existing, operational projects—unaffected by new tariffs—are well-suited for insurance portfolios due to their credit quality and long-term structure.
Projects set to launch in 2025 are expected to proceed largely as planned, as equipment is already in place. Some delays could emerge in 2026 due to ongoing supply chain issues. Any rollback of clean energy tax incentives under the Inflation Reduction Act could slow progress but is viewed as a temporary hurdle.
Demand for energy continues to grow. In 2024, global energy consumption rose by 2.2%, significantly above the 10-year average of 1.3%, per the IEA. This trend supports continued large-scale investment in renewable infrastructure.
Regulatory and Currency Considerations
Non-U.S. insurers will need to factor in the cost of currency hedging when investing in U.S.-dollar-denominated assets. This includes evaluating the use of FX forwards or cross-currency swaps and understanding how market volatility may impact hedging costs.
Regulatory requirements differ by region. European insurers, for example, must assess whether the investment qualifies as “infrastructure” under Solvency II, which can reduce capital requirements. They must also consider if the asset meets the Matching Adjustment eligibility criteria, particularly in relation to prepayment risks.
In the U.S., most of these assets are rated BBB– and receive a NAIC 2.C designation, making them suitable candidates for insurers' private placement portfolios.
Conclusion
For insurers with long-duration liabilities, clean energy infrastructure presents a compelling investment option. These assets offer an appealing combination of return potential, diversification, capital efficiency, and relatively low risk. While short-term challenges like tariffs and policy changes exist, they are unlikely to derail the broader growth trajectory of renewable energy investments. In our view, the demand for clean power and the stability of long-term infrastructure assets make this an enduring and valuable opportunity for insurers.
Click here to know more about AB’s approach to responsibility.
Private credit also brings greater structuring flexibility, offering tailored solutions that match insurers’ longer investment horizons. This has helped create more consistent funding streams for project developers who might otherwise rely on short-term bank lending.
The U.S. Market: A Standout Opportunity
Currently, the U.S. presents the broadest range of attractive options for both domestic and European insurers. Renewable energy has become the fastest-growing and most cost-effective power source in the country, with the scale of the U.S. market providing ample investment choices.
Although Europe has made considerable progress in adopting renewables—solar and wind have surpassed fossil fuels in many areas—there are fewer insurance-suitable assets available with the necessary investment-grade credit ratings and structural features.
Managing Tariff and Policy Risks
Recent U.S. tariffs on certain imports may affect upcoming projects, particularly those relying on foreign equipment. However, with solar panel production increasingly diversified beyond China, the impact of tariffs has been softened. Additionally, many existing, operational projects—unaffected by new tariffs—are well-suited for insurance portfolios due to their credit quality and long-term structure.
Projects set to launch in 2025 are expected to proceed largely as planned, as equipment is already in place. Some delays could emerge in 2026 due to ongoing supply chain issues. Any rollback of clean energy tax incentives under the Inflation Reduction Act could slow progress but is viewed as a temporary hurdle.
Demand for energy continues to grow. In 2024, global energy consumption rose by 2.2%, significantly above the 10-year average of 1.3%, per the IEA. This trend supports continued large-scale investment in renewable infrastructure.
Regulatory and Currency Considerations
Non-U.S. insurers will need to factor in the cost of currency hedging when investing in U.S.-dollar-denominated assets. This includes evaluating the use of FX forwards or cross-currency swaps and understanding how market volatility may impact hedging costs.
Regulatory requirements differ by region. European insurers, for example, must assess whether the investment qualifies as “infrastructure” under Solvency II, which can reduce capital requirements. They must also consider if the asset meets the Matching Adjustment eligibility criteria, particularly in relation to prepayment risks.
In the U.S., most of these assets are rated BBB– and receive a NAIC 2.C designation, making them suitable candidates for insurers' private placement portfolios.
Conclusion
For insurers with long-duration liabilities, clean energy infrastructure presents a compelling investment option. These assets offer an appealing combination of return potential, diversification, capital efficiency, and relatively low risk. While short-term challenges like tariffs and policy changes exist, they are unlikely to derail the broader growth trajectory of renewable energy investments. In our view, the demand for clean power and the stability of long-term infrastructure assets make this an enduring and valuable opportunity for insurers.
Click here to know more about AB’s approach to responsibility.
Companies