Insurers’ ratings are likely to be resilient to a moderate fall in commercial real-estate (CRE) values, Fitch Ratings says in a report, although a systemic crisis would put greater pressure on individual issuers with larger exposures.
European insurers’ CRE exposures amounted to 4.1% of aggregate EUR11.5 trillion assets at end-3Q2022, of which direct CRE investment exposure comprised EUR202 billion, or 1.8% of total assets.
Assuming an arbitrary full write-down of European insurers direct CRE holdings, 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 (see Private Equity & Venture Capital Investment in FinTech).
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.
However, in recent years indirect CRE investments, which include all forms of lending and equity holdings in real-estate investment vehicles, have comfortably exceeded direct CRE exposures and have grown at a faster rate than direct CRE exposures over the past four years (4% CAGR for indirect vs 1% CAGR for direct).
On a solo insurer basis, direct CRE exposures to total investment assets varies significantly by jurisdiction – it is highest in Austria (10%), Switzerland (8%) and Belgium (4%), and lowest in the UK (1.4%), Denmark (1.1%) and Italy (0.6%).
Some insurers are exposed to the risk that their reported asset values, and therefore capital, overstates the value of real-estate portfolios (see how to Implement ESG Investment Strategy).
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.
Insurers’ direct CRE exposure in Europe is heavily concentrated, with 10 insurance groups accounting alone for over 77% of all direct CRE exposure.
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. This reflects the widespread trend towards fixed interest exposures on insurers’ balance sheets.