Aviva and other UK life insurers are being mispriced because of fears over exposure to commercial property, according to the Royal Bank of Canada (TSX:RY).
Hammering home the point in what is RBC’s second note on the subject in under a week, the Canadian bank says it is crucial to delineate between direct investment in property and commercial mortgages.
While direct investment carries more upside potential, commercial mortgages generally pose a lower risk.
“Most importantly, the income received by insurers through commercial mortgages is extremely secure, due to the choice of high-quality counterparties, which has improved significantly over the past two decades.
“Moreover, these mortgages have conservative loan to values (LtVs), which provides additional protection, and the property is used as collateral for the loan.”
According to RBC, UK life insurers’ exposure to CRE equates to 54% of shareholder equity of which 20% is direct ownership and 34% commercial mortgages or CMBs.
Risks for the two are completely different, says the bank, and the risk of insurers having any issues with commercial mortgages is lower than current UK life share prices suggest.
RBC has 'outperform' ratings on Aviva, Just Life, Legal & General, Chesnara, Phoenix and M&G.