Commercial real estate adversely affects insurers’ 2023 financial results

Morningstar DBRS has published a new commentary looking at how exposed Canada’s largest insurance companies are to the commercial real estate (CRE) market.

Entitled Large Canadian Life Insurers’ CRE Exposure Poses a Threat to Their Otherwise Positive Operating Environment, the report looks at the portfolios of Manulife Financial Corporation, Great-West Lifeco Inc., Sun Life Financial Inc. and iA Financial Corporation Inc.

“The recent CRE deterioration has had a negative impact on the Big 4’s earnings, primarily stemming from decreases in property valuations, rather than credit impairments,” the firm writes in a statement about the commentary’s release. “As long-term investors with a significant asset base, substantial capital and strong earnings, the Big 4 are well positioned to manage further CRE-related pressures.”

CRE-related write-downs, caused by remote work, higher interest rates and sustainability concerns, were easily absorbed in 2023, they add. “We believe capital levels will not be affected in the likely event of further CRE deterioration over the remainder of the year,” adds Nadja Dreff, senior vice president and sector lead, North American insurance ratings with Morningstar DBRS.

 The report says commercial mortgages and investment properties account for between seven per cent and 18 per cent of insurers’ invested assets.

Declining property valuations 

“Recent CRE market challenges and declining property valuations have hurt the Big 4's earnings and will likely remain an issue in 2024. However, we expect the fallout from CRE deterioration to be manageable for these insurers given their significant asset base, substantial capital buffers and the overall positive operating environment. Their CRE exposures are not significant enough to affect capital; however, market developments in this sector warrant continuous monitoring,” they write.

They add that the rest of the year may bring further CRE deterioration but the research firm believes “the related earnings impact will be manageable as long as core insurance businesses segments continue to perform well.”