European insurers’ ratings are likely to be resilient to a moderate fall in commercial real estate (CRE) values, although a systemic crisis would put greater pressure on individual issuers with larger exposures, suggests a new report from analysts at Fitch Ratings.
According to the rating agency, European insurers’ CRE exposures amounted to 4.1% of aggregate €11.5 trillion assets at the end of Q2 2022, of which direct CRE investment exposure comprised €202 billion, or 1.8% of total assets.
Assuming an arbitrary full write-down of European insurers direct CRE holdings, Fitch’s analysts note that system-wide, this would only lead to a 7% depletion in insurers aggregate capital base.
However, the impact of reduced valuations would be far higher for Swiss, Austrian and Belgian insurers.
The direct CRE exposures in these markets are around 48%, 25%, and 21% of their capital base, respectively, compared with just under 13% for the UK, under 8% for the Netherlands and 6% for Germany.
“Insurers in our rated universe have well-diversified investment portfolios overall combined with strong sub-sector diversification,” Fitch Ratings explains.
The rating agency continues, “CRE has a 25% capital charge under Solvency II, multiples of an ‘A’ or ‘BBB’-rated corporate bond portfolio, so discouraging a high allocation.
“Also, CRE cannot be used to match interest rate risk or the duration of liabilities. Concentrated exposures to CRE-related risks are generally limited as a result.”
Some insurers are exposed to the risk that their reported asset values, and therefore capital, overstates the value of real estate portfolios.
Fitch Ratings notes that in 2022, valuations of firms’ investment properties did not exhibit the same declines as quoted instruments, such as long-duration bonds and equities, despite widespread rises in long-term interest rates.
“However, insurers do not have substantial liquidity pressures, which means they are unlikely to need to sell real estate at distressed values,” the analysts state.
Insurers’ direct CRE exposure in Europe is heavily concentrated, with 10 insurance groups accounting for over 77% of all direct CRE exposure alone. On an individual basis, the largest direct CRE owners are Swiss Life, Axa, Generali and Allianz.
Indirect exposures, which include all forms of lending and equity holdings in real estate investment vehicles, are more widely distributed, with the same insurers only accounting for around 37% of all indirect exposure.
According to Fitch Ratings, this reflects the widespread trend towards fixed interest exposures on insurers’ balance sheets.
The rating agency’s analysts write, “In our view, the higher prevalence of indirect exposures among insurers reflects the widespread trend towards fixed interest investments on insurers’ balance sheets, where the credit risks are driven not just by the underlying real estate value, but also by factors such as the seniority of instruments, the counterparties involved, and refinancing considerations.
“Most debt instruments are also structured for shorter terms, reducing the owners’ risks associated with being stranded with older, obsolete properties.”
