At about 4% of assets, the European insurance sector faces low exposure to the rising risks of commercial real estate (CRE), according to Fitch Ratings, with most insurers facing minimal risk to capital or ratings from falling CRE valuation.
Fitch’s report also highlighted that just under half of that exposure is direct, while indirect exposure is mostly through holdings of CRE sector equities and loans.
“CRE is in the spotlight due to steep valuation declines in some segments, with implications for lenders and institutional investors. Some banking sectors, notably those in the US and Germany, have significant exposure but insurance sectors are generally less affected,” Fitch analysts explain.
Adding: “Even the US life sector, where exposure is materially higher than for European insurers, is unlikely to face pressure on ratings, and CRE has not yet featured significantly in European insurers’ 2023 results announcements or audience questions.”
According to the report falling CRE valuations may dent insurers’ capital through unrealised losses on both direct and indirect exposures in shareholder funds.
But it predicts that there will be little impact from exposures in unit-linked or with-profits funds where losses are largely borne by policyholders.
Analysts stated: “We do not expect European insurers to be forced sellers of CRE exposures in shareholder funds as they have ample liquidity. Most asset portfolios are dominated by highly liquid assets, particularly investment-grade bonds, which means that realised CRE losses are unlikely in the near term, except in the case of defaults.”
Fitch also noted that, given the low average exposure, even severe unrealised or realised CRE losses would not have a material impact on the European insurance sector’s overall capital.
It estimates that “an arbitrary 50% write-down of all CRE exposures, direct and indirect, would erode less than 10% of the sector’s aggregate capital base. Nevertheless, a full write-off on a potentially oversized position (e.g. Signa Holding) could reflect poorly on an insurer’s asset risk selection.”
The report also notes that some markets, and individual insurers, have significantly higher direct or indirect CRE exposures than the sector averages.
For example, the Austrian, Swiss and Belgian markets have a higher direct exposure, and above-average capital, which mitigates the risk.
Additionally, several of Europe’s largest insurance groups also have fairly high exposure, both by amount and relative to capital.
Fitch concluded: “We take account of CRE exposure in our rating analysis, with particular focus on insurers with higher exposure given the pressure on CRE valuations from higher interest rates and structural shifts adversely affecting some CRE segments. Depending on the circumstances, we may include direct CRE holdings in our risky-assets ratio when assessing investment and asset risk. We also include CRE sector equities in the ratio, along with sub-investment-grade and unrated bonds.
“We believe European insurers’ ratings would be resilient to further moderate declines in CRE valuations. However, severe falls could materially erode rating headroom for the most exposed insurers.”
