A looming revaluation of mortgage loans could wipe out as much as €900m ($1.1bn) off the value of assets held by Dutch life insurers, rating agency Moody's has warned.
Mortgage loans are held at fair-value on insurers' books, but the industry is coming under pressure to tighten up the processes of valuation, as exposures to this asset class have increased by a third in the past couple of years.
So far, only Aegon has made changes to its discount cash-flow model. The insurer has seen the value of the portfolio – which accounts for half of total investments – fall by 2% in the third quarter, as a result.
This had a knock-on effect on the solvency ratio of the Dutch life subsidiary, which plunged 25 percentage points in the period.
The impact of a revaluation on other insurers is likely to be smaller, as exposures are typically less material, but it will still be significant, predicts Benjamin Serra, vice president at Moody's.
In a report published on 20 November, he wrote that if the changes made by Aegon are replicated across the industry this would lead to a €900m loss in the life sector and an 8 percentage-point drop in solvency ratios.
Aegon relied on additional data points to derive the discount rate, reflecting recent residential mortgage-backed security transactions, but there is no consensus in the industry about this approach.
During a presentation to investors on 21 November, Theo Berg, director of group actuarial and risk management for Delta Lloyd, said that there is an ongoing debate about how to value mortgages.
Delta Lloyd has the second largest exposure to mortgage loans, at 21%, followed by Utrecht-based ASR Nederland and NN Group. In aggregate, life insurers have about €45bn tied in mortgage investments.