Insurers likely to withstand moderate fall in CRE values - Fitch Ratings

Written by Dan McGrath

19/6/2023

Insurers’ ratings are likely to be resilient to a moderate fall in commercial real-estate (CRE) values, Fitch Ratings has said in a new report.

However, the American credit rating agency has said that a systematic crisis would put greater pressure on individual insurers with larger exposures.

European insurers’ CRE exposures amounted to 4.1% of aggregate €11.5trn assets at the end of Q3 2022, of which direct CRE investment exposure comprised €202bn, or 1.8% of total assets.

Fitch Ratings has said that 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, it said that the impact of reduced valuations would be far higher for Swiss, Austrian and Belgian insurers, with their direct CRE exposures in these markets being around 48%, 25% and 21% of the capital base respectively.

These results compare to just under 13% for the UK, under 8% for the Netherlands and 6% for Germany.

Fitch Ratings continued by saying that some insurers are exposed to the risk that their reported asset values, and therefore capital, overstates the value of real estate portfolios. 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.

With 10 insurance groups accounting for over 77% of all direct CRE exposure, the exposure in Europe is heavily concentrated, Fitch Ratings said. 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 27% of all indirect exposure.

Fitch Ratings said that this reflects the widespread trend towards fixed interest exposures on insurers’ balance sheets.

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