Canada's four largest life insurance companies will face further increased fallout from their exposure to commercial real estate this year, according to a large ratings firm.
Morningstar DBRS said in a report the deterioration in the value of commercial real estate holdings from mortgages and investment properties has been extensive but is manageable for Manulife Financial Corp., Great-West Lifeco Inc., Sun Life Financial Inc. and Industrial Alliance Financial Corp.
"Exacerbated by the durability of remote work, as well as higher interest rates, the [commercial real estate] market has been under pressure, leading to asset markdowns and increased provisions for credit losses," the report stated.
Toronto-based Manulife, with 74 million square feet in its real estate portfolio across 34 cities globally, told Bloomberg News the value of its U.S. office investments had declined 40%. The life insurer reported a 12% drop year over year in the valuation of its office properties globally.
Scott Hartz, chief investment officer for Manulife, pointed out two factors that have hit real estate over the past two years.
"One has been the secular headwinds in office in North America, in particular," Hartz said during a conference call with analysts in February to discuss results. "And the second has been rising interest rates and the rising discount rates, which has hit all property types. With the long-term hold, we do not see that as value-destroying at all."
'Continuous Monitoring'
The Morningstar DBRS report said the exposure in real estate of Canada's big four life insurance companies ranges from 7% to 18% of their invested assets. The agency thinks the commercial real estate deterioration to be manageable for these insurers given their significant asset base, substantial capital buffers and the overall positive operating environment.
"Their [commercial real estate] exposures are not significant enough to affect capital; however, market developments in this sector warrant continuous monitoring," said the report.
Winnipeg-based Great-West Lifeco Inc. has the largest exposure with 14% of its asset base in commercial real estate mortgages and another 4% in investments. Quebec City-based Industrial Alliance Financial Corp. has the least exposure with just 7% of its assets connected to commercial real estate.
Sun Life has the greatest direct investment exposure with 6% of its asset base in property and another 8% in mortgages. Manulife has 3% in investment properties and 7% in mortgages.
"For the Big 4, a weighted average of 40% of their CRE property portfolio is in office space, including properties for their own use. However, when compared with their total invested assets, this figure appears significantly more contained at 1.5%. The Big 4 also hold a substantial amount of CRE mortgages with about 20% of those related to office buildings, which amounts to 1.8% of their invested assets," said the Morningstar DBRS report, noting life insurers significantly reduced the proportion of office real estate in their CRE property portfolio even before the start of the pandemic.
When it comes to office, Industrial Alliance Financial Corp. has the most exposure at 85% of all commercial properties the company holds. The company reported its office portfolio had an 87% occupancy rate at the end of 2023.
For the year that ended Dec. 31, Industrial Alliance Financial Corp. reported its investment properties were worth $1.61 billion, down from $1.8 billion a year earlier.