This $70 Billion Nordic Manager Looks to Loans to Juice Returns

  • Norway, Sweden real estate offers yield pickup, Storebrand
  • Trying not to have too long a duration, asset manager says

Norway’s biggest life insurer is stepping up investments in direct loans as a way to escape negative interest rates.

Storebrand ASA has a “strategic intention” to buy more asset-backed loans and bank syndicate loans, according to the insurer’s asset management chief.

“We have over the last years built up a loan portfolio and stepped up this effort over the last year,” Jan Erik Saugestad, chief executive officer at Storebrand Asset Management, said in an interview on Tuesday. “We take part in asset-backed loans and also participate in other direct loans in bank syndicates with predominately Nordic banks. The loan market offers us an opportunity to get a higher running yield than in the bond market.”

Low rates are forcing life insurance companies to broaden their search for yield to meet requirements for guaranteed returns. Norway’s central bank is likely to cut its key rate on Thursday, Sweden introduced negative rates in 2015 and Denmark has been below zero for the better part of almost four years.

“It’s very demanding with low rates with the type of return guarantees we have,” Saugestad said. “Therefore, we look for alternative investments like real estate and loans. Furthermore, we have looked at direct investments in infrastructure but it has been demanding so far for several reasons, for example capital requirement rules.”

Real estate in Norway and Sweden “offers a liquidity premium and a yield pick up”, according to Saugestad, who oversees 571 billion kroner ($70 billion).

“It’s not healthy that, long term, capital costs come down to such low levels as we see in many markets,” he said. “It’s hardly healthy that we operate with negative rates. In such an environment there’s always a risk that it can lead to mis-allocation and bad investments. Clearly, we are cautious about this when we make our investments.”

While the developed world may have to adapt to slower economic growth, there’s still a risk of getting trapped by rising rates, Saugestad said.

“In our tactical mandates we try not to have too long duration,” he said. “We believe that we are on a positive economic growth trajectory and that the market rates will respond to that.”