Allianz CFO: Real estate volatility cushioned by policyholders
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Allianz has marginally reduced its exposure to commercial real estate investments but the group’s chief financial officer remains confident about the asset class.
This is because any volatility in the commercial real estate market is absorbed by the company’s life insurance policyholders, according to Giulio Terzariol.
The German insurance group allocated €26.5bn (£23bn), or 3.7% of its investment portfolio, to real estate as of 30 June. The figure was slightly lower than €27.6bn or 3.9% at the 2022 year-end.
A combination of factors has changed the commercial real estate market since 2020. These factors include the hybrid business model adopted by office workers after Covid-19, which affected how buildings are used, rising interest rates and bank failures in the US and Europe, leading to falling property values.
Despite the marginal drop, Terzariol told journalists on Thursday the company was neither increasing nor decreasing exposure to real estate and that it will continue to be part of the firm’s asset allocation.
Allianz has both debt and equity investments in commercial real estate.
On the debt side, Terzariol said there were no major issues “because of the quality of the portfolio that we had”.
Presenting Allianz’s half-year results, he said: “In commercial, non-residential real estate, basically, we don't see any kind of defaults. So from that point of view, we feel very good about the commercial debt real estate.”
For commercial real estate equity, Terzariol noted “some pressure” in the market but stressed that the group was careful in selecting which balance sheets should be matched with the asset.
He said that the majority of the firm’s real estate investment was made on behalf of its life insurance portfolio. Some life contracts have policyholder participation features, where the risk or a portion of it is shifted to policyholders.
“There is a participation of the policyholder, which goes both ways,” he said. “Clearly, the policyholders are benefitting also from the development of the real estate because you need to assume that this development is going to be positive. But as the volatility comes in and out, the majority of the volatility is basically absorbed by the policyholder.”
Terzariol explained that Allianz’s life insurance business featured a “discretionary benefit” to cushion the impact of property valuation changes.
“If there is an impact on the valuation of the assets, the discretionary benefit to the policyholder is reduced. We are speaking of around €100bn of these discretionary benefits. So we have a significant amount of cushion in the case of changes to the valuation to our assets,” he said.
“There is not a meaningful impact on our numbers because of these future discretionary benefits.”
He also highlighted that policyholders do not see such volatility due to protection mechanisms in place.
“It's not that we say ‘there is a policyholder participation, so we don't care’. We really care about our policyholders. We strongly believe that over the course of a cycle, it is very good to invest in real estate, and we can insure any credit instability to our policyholders. So the mechanism in our life businesses is done in a way that the volatility can be neutralised over time.”
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