Aviva PLC (LSE:AV.), Legal & General Group PLC (LSE:LGEN) and other life insurers are likely to endure an 'overhang' on their shares from worries about their exposure to commercial real estate (CRE), analysts at Jefferies said.
Concerns about CRE have come to the fore as risks specific to the sector as working from home has an impact, tied in with rising interest rates and higher lending terms to reflect liquidity concerns in the banking sector following the collapse of Silicon Valley Bank and Credit Suisse.
Life insurers are major investors in CRE and so have understandably drawn plenty of attention following these events, the analysts said.
"Whilst we acknowledge there is downside risk, and the potential to generate an overhang on share prices, material losses are unlikely in our view."
In a note published today, the analysts looked at the exposure amongst UK life insurers, with CRE exposed assets estimated to make up 14% of invested assets across the largest FTSE 350 players, Aviva, L&G, Just Group PLC (LSE:JUST) and M&G PLC (LSE:MNG).
The Jefferies team conclude that "only a small portion of investments are actually sensitive to short term movements in property valuations, representing 13% of CRE assets and 2% of total invested assets" across the four companies.
"Therefore, the key risk across the majority of UK life insurer's CRE investments (87%) is counterparty risk.
"Insurers could find themselves more exposed to property risk in a severe downside scenario, whereby the counterparty defaults," however they said this is "unlikely in our view due to a number of structural defences" such as high counterparty credit quality and low loan-to-value ratios.
Which insurers are most exposed?
In the scenario that these structural defences were to fail, seen as "unlikely", the analysts acknowledged that "exposure to property valuations could fall on to the insurer's balance sheet".
Of the four companies, L&G has the largest exposure with £14.7bn in CRE, including £5.3bn in long-term rental income property, £2.9bn in investment property, £2.7bn in CMBS, £2.25bn in commercial mortgages and £1.4bn in real estate bonds.
Aviva's £8.4bn total is mostly in commercial mortgages at almost £6bn, with the next largest being real estate bonds at £1.7bn.
CRE exposure for L&G represents just 18% of invested assets but 110% of Tier-1 own funds, it was calculated, while at Aviva the respective proportions are 11% and 77%.
With £3.15bn invested in CRE, M&G had the highest proportion of exposure as a percentage of total assets, at 22%, though the 55% of T1 funds was the lowest.
Just Group's £1.3bn is 6% of invested assets was the lowest, while its exposure is 75% of T1 funds.