commercial real estate / HelloABC

Canada’s four biggest insurers — Manulife Financial Corp., Great-West Lifeco Inc., Sun Life Financial Inc., and iA Financial Corp. Inc. — are exposed to the troubled commercial real estate sector through both mortgages and investment holdings, finds Morningstar DBRS Inc.

Driven by a combination of high interest rates and declining demand for office space in particular, the commercial real estate market has been under pressure, “leading to asset markdowns and increased provisions for credit losses,” the rating agency said.

Lower valuations and rising provisions weighed on the insurers’ earnings last year, the report said, and these trends are expected to continue in the year ahead.

“Given the prevailing macroeconomic environment, further [commercial real estate] deterioration and declines in office building values are likely, especially for older and less energy-efficient buildings in less desirable locations,” it said.

However, DBRS said the insurers are well positioned to absorb the fallout from ongoing weakness in the sector.

For one, the pressure on earnings will be offset by the positive operating environment for insurers, and the “generally strong performance in their various insurance and asset management lines of business,” it said.

Additionally, the insurers’ strong capital positions also buffer them against the impacts of continued weakness in commercial real estate, it noted.

“While the rest of the year may bring further commercial real estate deterioration, we believe the related earnings impact will be manageable as long as the core insurance business segments continue to perform well,” DBRS said. “Over time, the higher interest rates that have contributed to large property valuation decreases and their related negative earnings impact will continue to bolster returns.”