* Pressure to keep investment returns above 3 percent
* Diversification is at early stage; small part of portfolios
* Loan moves could offset part of banks' deleveraging
PARIS, Feb 7 (Reuters) - European insurers and asset managers are taking on more risk to boost investment returns by lending to big-ticket infrastructure projects, companies and property developers where banks might no longer be able to provide.
The diversification, starting from a small base, stretches from France, where BNP Paribas Investment Partners recently launched its third corporate debt fund for insurers in a year, to northern Europe, where Swiss Re is to invest $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 year with student housing specialist Unite Group, while in France Europe's second-biggest insurer AXA is now teaming up with Societe Generale to lend to small- to mid-sized companies.
"We are re-opening some boxes that have been closed since 2008 in the crisis," said Laurent Clamagirand, who oversees a 500 billion euro ($676 billion) portfolio as AXA's chief investment officer. "The frontier of our risk appetite has constantly evolved."
Over time AXA is likely to boost investments in corporate, infrastructure and other types of debt to between 10 and 20 percent of its 40 billion euros of yearly investments from all but zero as recently as five years ago.
Life insurers' diversification into lending reflects the pressure to maintain returns in markets such as France above 3 percent, even as yields on many securities have dipped far below that, to match longer term commitments on some of their policies, especially those carrying guarantees on returns.
With banks cutting back on lending to meet the banking industry's Basel III rules on capital adequacy rules, the insurers could step in at the margins to meet some of the demand for credit.
But moving into lending is risky. The assets underlying the loans are less liquid and harder to analyse than the sovereign and corporate bonds which are the traditional mainstay of insurers' investments.
"I think it's fair to say that we are concerned that all insurance companies do not necessarily have the expertise to invest in these asset classes and as such they may be left with the lowest quality assets," said Benjamin Serra, a Paris-based financial institutions analyst at credit ratings agency Moody's.
However, the approach of new Solvency II capital adequacy rules for European Union insurers aimed at reducing the risks of failure for policyholders may be contributing to the shift into less-liquid but potentially higher-yielding assets.
In preparation for the Solvency II regime many insurers have already moved out of share investments in favour of corporate bonds and other fixed income assets. But the increased demand from insurers and others has already pushed yields on such assets lower, forcing insurers to look for higher returns in other areas.
At the same time, a delay in the implementation of Solvency II has slipped until 2016 or 2017, with many insurers lobbying to loosen its treatment of investments such as infrastructure loans, with politicians eager not to kill an emerging source of credit at a time when banks are clamping down on lending.
"WE'RE NOT A BANK"
Typically the French unit of Europe's largest insurer Allianz, which has an 80 billion-euro fund as part of its parent's 400 billion-euro portfolio, is taking a tentative approach, at least with regard to corporate loans.
At the same time it has been increasing its bet on areas like commercial real estate where some recent loans are yielding 1.5 to 2 percentage points more than the equivalent French sovereign bonds. Allianz's French unit made 450 million euros of such loans last year and expects more in 2013.
"I think you can lose a lot of money lending to the wrong person," said Peter Etzenbach, chief investment officer for Allianz France. "We're not a bank, we don't ever want to be a bank, so we need to find a way where we feel comfortable with the risks we take."
Another potential area is infrastructure lending, where the group has hired a team to vet investments and expects to announce its first deal in 2013.
"The volumes could be significant," he said. "We could easily, just the French balance sheet, have a billion of it in a given year."
Insurers and fund managers say the risks are capped because the investments are proportionately small and because their long-term nature matches their long-term payout obligations even if such investments are frequently illiquid.
"Such products are less liquid than stocks and bonds and there 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 Partners in managing insurers' portfolios.
"Even so, the risk that I see is that if all insurers try to adopt this kind of approach at the same time, there's the risk of a bubble."
BNP Paribas's asset management arm has created three different funds targeted at insurers seeking access to corporate debt as an asset class and is also working on a dedicated mandate for a big European insurer.
The team has boosted assets under management by 700 million euros to 1.7 billion, with another fund just gearing up and likely to raise over 100 million investing in both European and U.S. loans on behalf of insurers in countries including Belgium, Italy and Switzerland.
"What our insurance clients tell us is that there is an enormous amount of buzz right now (around alternative investments)," said Anne Dille-Weibel, head of institutional sales, banks and insurance, at BNP Paribas Investment Partners.