Zurich Insurance to Offer Direct Lending in Europe to Boost Returns

By | December 16, 2014

Zurich Insurance Group AG, Switzerland’s largest insurer, is about to make its first investments in European direct lending, including infrastructure debt.

The insurer wants to lend to small to medium-sized European companies and commercial real estate owners to finance infrastructure projects as low interest rates erode the company’s earnings from fixed-income investments, Chief Investment Officer Cecilia Reyes said in an interview in Zurich. The initial investments could be made early next year, she said.

Zurich Insurance has been lending to corporate borrowers in the U.S. for about five years, and is now looking to Europe as banks step back and shrink their balance sheets because of new capital regulations. Insurers and pension funds see an opportunity to fill the void and improve returns.

“There is demand for credit in Europe,” said Reyes, adding that “in the current environment of low interest rates the return you get from these assets is high compared to that of government bonds.”

Other institutional investors offering direct loans include London-based Legal & General Group plc, which said in July it wants to provide financing to mid-market companies in the U.K. and Europe. Germany’s biggest public pension fund, the Bayerische Versorgungskammer, also lends directly to commercial real estate projects.

‘Significant’ Increase

Because of its long-term liabilities, Zurich Insurance can hold less liquid assets such as direct loans. Reyes said Zurich will initially invest “hundreds of millions” of euros, declining to be more specific. New direct corporate lending will be focused mainly on Germany and euro-denominated private debt in other European countries, she said.

Zurich Insurance also wants to increase its real estate holdings, which currently make up about 5.5 percent, or $12 billion, of its assets.

“We are going to increase our allocation to real estate in a significant way,” said Alessandro Bronda, head of global real estate investment strategy. “The yield spread that you get in real estate remains attractive.”

About three-quarters of the company’s real estate assets are in Switzerland, Germany and the U.S., while it also invests in Spain, Italy, Malaysia and Chile. Zurich focuses on offices and residential properties and occasionally invests in retail space and warehouses.

Office Buildings

The insurer wants to boost its real estate holdings in these countries as well as expand into Australia, Japan, Canada and in “some other countries in the euro zone such as Portugal,” Bronda said. The company hired CBRE Global Investors in June to find 200 million pounds ($313 million) in investments in the U.K., its first foray into that market.

The company already owns buildings including 111 Wall Street in New York and the Alpha Rotex office tower in Frankfurt. It bought 13 office properties from the Generalitat de Catalunya in central Barcelona for 201 million euros ($250 million), its largest deal in 2014, in July as it sees capital values in Spain moving higher. Zurich is Europe’s fifth-largest real estate investor after insurers such as Axa SA, Allianz SE and Assicurazioni Generali SpA.

“The limitation is finding the desirable assets – that for us is the biggest constraint,” Reyes said. “To the extent that we will find these assets in the market, we will buy them.”

Was this article valuable?

Here are more articles you may enjoy.