Swiss insurer Zurich Financial Services AG has sharply raised provisions to shield against property loan losses in UK and Ireland, highlighting lenders' concerns about Europe's struggling real estate markets. The group, which was financing commercial property developments in the two countries, said on Friday it has stopped all new property development lending there, and set aside an additional $330 million to cover potential losses.
"Loan provisions are regularly reviewed but given the continuing deterioration in the UK and Irish property markets, the group has carried out a further review of its property development loan books and the respective provisioning levels," Zurich said in a statement. At 0855 GMT, shares of Zurich Financial were down 0.5 percent, underperforming the STOXX Europe 600 Insurance index, which was down 0.2 percent.
The group, which does not provide mortgages to retail clients in these markets, said it made the property development loans through its subsidiaries Dunbar Bank and Zurich Bank. "Ending this business (in the UK and Ireland) is the better option at the moment," Zurich spokesman Angel Serna said, adding the group did not have similar operations elsewhere.
Real estate markets in Britain and Ireland are among the worst hit by the global financially crisis, and lender fears have stifled financing to those debt-starved markets, potentially hampering their recovery. Lenders' concerns about the outlook for commercial property, along with tough new banking rules in Europe, has prompted even stronger lenders such as HSBC and WestImmo to limit loans to the market.
J.P. Morgan analyst Michael Huttner said the UK and Irish real estate loan provisions should be one-offs for Zurich Financial, and were unlikely to affect other major European insurers, such as Germany's Allianz, to the same extent.
"I would say this is a bit of a one-off. This is because Zurich Financial has a bank in UK and Ireland, I can't think of any other insurer which have a bank in UK or Ireland," he said. Zurich Financial was making the provisions now because most of its UK and Ireland loan book was in property development, which would have committed it to financing those projects until completion. "A house which is half-built has zero value, so you basically need to finish it. At least the completed house has some value, although maybe not as much as you thought," he said.
Zurich said the total increase in provisions amounted to $250 million for Britain, taking the provisions-to-loan ratio to 18 percent for its property loan portfolio, which stood at $1.91 billion at the end of the first quarter. Provisions were bumped up by $80 million for Ireland, bringing overall provisions to 50 percent of the portfolio of $495 million. The announcement was likely to revive concerns about other risks on insurers' balance sheets, said analyst Martin Koch at banking group Wegelin in a note.
"In addition to risks from real estate markets, worries about potential writedowns on government bonds are weighing on investors' sentiment," he said. However, Zurich had so far weathered the crisis well, he said. "The group has a solid balance sheet and a very successful business model." Zurich will record the charges in its non-core business segment when it publishes first half results on August 5. Both subsidiaries remain adequately capitalised after a capital injection from the group, Zurich said.