Insurance Companies Have Unrealised Gains Of €2,400M From RE

26 August 2016 – Expansión

Mapfre, Mutua Madrileña and Catalana Occidente own the majority of the real estate in the insurance sector, whose total portfolio amounts to €4,475 million.

Insurance companies in Spain are accumulating a cushion of unrealised gains in their real estate investments amounting to €2,433 million, according to data from the Director General of Insurance and Pensions.

This amount is the difference between the value that the companies assigns these assets on their balance sheets and the market price of these assets, according to the mandatory appraisals that have to be performed periodically by independent appraisers.

These latest gains in the insurance sector are still well below the threshold of €4,226 million achieved in 2009, at the beginning of the burst of the real estate bubble.

Unrealised gains are recognised in the accounts of entities if the properties are sold at a profit. They are also included in the calculation to measure the solvency margin of the entities, which measures the firms’ strength to deal with unforeseen events using their uncommitted assets.

Insurance companies have traditionally invested in properties, given that they are a particularly appropriate asset for the long term over which they conduct their activity. They also generate regular income in the form of rental payments.

In addition, insurance companies have had to diversify their portfolios following the decrease in interest rates in recent months, which makes the investment strategy of these entities more complicated; they have traditionally focused on public debt, primarily in Spain.


Insurance companies are risk averse in their investments and in the face of this new panorama, they have made several purchases that have increased their real estate portfolios, particularly important for the Spanish capital firms Mapfre, Mutua Madrileña and Catalana Occidente, which own the majority of the sector’s total portfolio of €4,475 million, according to data from the Director General of Insurance and Pensions. In recent months, these three entities have been involved in several real estate purchases amounting to more than €250 million. (…).

The Mapfre Group, which has a presence in fifty countries, reported latent gains of €975 million in its accounts for 2015 on the basis of the book value of its total real estate portfolio (€2,267 million) and the market price (€3,242 million). Most (56% or €1,835 million) correspond to real estate investments, whilst the rest (44% or €1,406 million) are properties used by Mapfre. (…).

Meanwhile, Mutua has accumulated a piggy bank of unrealised real estate gains amounting to €462 million, with total assets worth €1,443 million at market prices and €981 million on the balance sheet. Its assets are concentrated in Madrid, where historically it has owned a handful of individual buildings on Paseo de la Castellana. (…).

Grupo Catalana Occidente’s investment in real estate amounts to €1,024 million, which includes unrealised gains amounting to €465 million. The insurance company, which has a presence in more than fifty countries, acquired a building measuring almost 4,000 sqm in the 22@ district in Barcelona in July.

Original story: Expansión (by E. del Pozo)

Translation: Carmel Drake

Banks Recognise Provisions For 15% Of Their Stakes In Sareb

25 January 2016 – Expansión

Accounting Circular / The “bad bank” is going to recognise losses amounting to almost €2,000 million on its credits and loans in its 2015 accounts.

The banks accept that their investments in Sareb have been a fiasco, but to protect their income statements in 2015, they have decided to make provisions for just 15% of their exposures, in line with the proportion recommended by their auditors. Nevertheless, some of the banks calculate that, in a best case scenario, they will actually have to write off half of their investments.

Sareb is trying to redefine its proposed business plan in the face of the new accounting obligations imposed by the circular prepared by the Bank of Spain (last year), which is forcing the bad bank to revalue all of its assets, at market prices, before the end of this year.

Although the field work has not yet been completed, sources close to the company acknowledge that the new valuations will significantly affect its provisioning requirement and, as a result, the company will generate sizeable losses in 2015, which will force it to reduce its share capital of €1,200 million, to almost zero, and to convert some of its subordinated debt, €3,600 million in total, into share capital to restore the company’s equity balance.

Accounting losses

Initially, Sareb estimated that the new accounting circular may force it to make provisions amounting to more than €500 million, which would have meant recognising losses in 2015, given that fewer assets were also sold last year, but as the process to value the assets on its balance sheet has progressed, that figure has increased to such an extent that certain shareholders now expect that “the provisions required against its non-property assets will amount to almost €2,000 million”.

Sources at the bad bank indicate that the additional provisions are due, above all, to the accounting requirements imposed by the Bank of Spain and have little to do with the actual deterioration of the company’s balance sheet. The reason is that the accounting circular does not allow Sareb to offset actual losses against unrealised gains, unless those gains are generated by the same type of asset as the losses. “And therein lies the problem”, according to sources close to the company, given that it seems that whilst the losses on the bank’s non-property assets (credits and loans) may amount to as much as €2,000 million, the valuation of its real estate portfolio is likely to generate gains of almost €1,500 million. The losses must be registered in the income statement, but the gains may only be recognised when they actually materialise.

These figures, which will be finalised at Sareb’s board meeting in February or March, when the entity’s accounts for 2015 and business plan to 2027 are approved, are the ones that have forced Sareb’s shareholders (the FROB with a 45% stake, the banks, except BBVA, which did not want to participate, several insurance companies and one real estate firm) to make provisions to cover their exposures and reflect the losses in their results for 2015. The main point is that the effort that the banks have made (Bankinter has already revealed its provisions when it presented its results, and the other banks will do so as and when they publish their accounts) is limited to providing against 15% of their total risk, capital and subordinated debt, when at least some of the banks admit, in reality, that “in the best case scenario, we are going to have to recognise losses equivalent to half of our investments”. (…).

It seems that the entities have agreed with their auditors to make limited provisions in 2015 in the knowledge that they will have to make further provisions against their exposures to Sareb during 2016.

Original story: Expansión (by Salvador Arancibia)

Translation: Carmel Drake

Banking Sector: RE Hangover Continues To Undermine ROE

28 October 2015 – Cinco Días

How to improve profitability has become the great challenge for the Spanish real estate sector now that the chapter involving the clean up of toxic assets from the banks’ balance sheets is coming to an end. The (sector’s) return on equity (ROE) has decreased by 6.8 basis points over the last six years, to 5.3% at the end of 2014, mainly due to the higher capital requirements demanded as a result of the clean-up process. But the current low yields, which will never return to their pre-crisis levels, are due not only to the near-zero interest rates, which are slashing margins, or to the scarce flow of credit. The real estate hangover from the long financial restructuring process is also weighing down heavily on the ROE.

According to AFI’s calculations, the sector has accumulated non-performing assets amounting to €238,000 million – including doubtful loans and foreclosed assets – which are generating zero yields and are consuming capital and provisions. In short, they could be reducing the sector’s annual profitability by up to 5.4 percentage points.

AFI says that some of these assets are actually generating negative returns, due to the management and maintenance costs associated with them. And the company calculates that if they were sold at their net book values – even ignoring the fact that some assets may be accounted for at higher than market value – and the liquidity obtained was reinvested in loans to households and companies, then “the sector could achieve an average annual return of 3% and moreover, it would save the provisions associated with those assets, which we estimate represent 10% of their net book value”. AFI added that this saving would result in around €13,000 million, a result that would finally release the burden of these assets, which still represent 8.8% of the sector’s balance sheet.

Modest expectations

The firm emphasises that “in order to improve returns, we need to accelerate the digestion of these unproductive assets”. However, its estimation of the improvement in Spanish banks’ ROE in the coming years does not exceed 6% or 7%.

AFI also points out that the decrease in the ROE in recent years has not been greater mainly thanks to the ECB, whose policy has allowed financing costs to be lowered and high capital gains to be generated on fixed income portfolios. Even so, it warns that the carry trade profits on these portfolios are not going to be repeated and it adds that unrealised gains on fixed income portfolios have decreased by more than 50% in 2015, due to the sales that have already been made and the valuation at market prices. “Therefore, the sector now needs to look for recurrent sources of profitability”.

Original story: Cinco Días (by Nuría Salobral)

Translation: Carmel Drake

CaixaBank Sells The ‘Torre Norte’ To SegurCaixa

15 April 2015 – Expansión

Barcelona / SegurCaixa has acquired the ‘Torre Norte’, valued at €14.5 million, as part of the strategic alliance between the bank and the insurance company.

SegurCaixa Adeslas, owned by CaixaBank and controlled by Mutua Madrileña, has purchased the Torre Norte (one of the three Nissan Towers in Barcelona) from CaixaBank. The transaction was valued at €14.5 million.

The sale forms part of the insurance sector alliance between Mutua and CaixaBank. The agreement made resulted in the segregation of the business between VidaCaixa, a fully owned subsidiary of CaixaBank, and SegurCaixa Adeslas. The latter was granted the option to buy the building, which it has (now) decided to exercise.

Following this transaction, the employees of SegurCaixa will occupy the Torre Norte and those of VidaCaixa will be housed in the Torre Sur. Microbank, another subsidiary of CaixaBank will occupy the top floor of the Torre Centro.

Mutua Madrileña hereby adds another building to its growing list of properties, worth €1.2 billion, which generated unrealised gains of €357 million last year.

The flagship building of the company, chaired by Ignacio Garralda, is the Torre de Cristal in Madrid, which has an appraisal value of €504 million, and therefore accounted for 41% of the insurance company’s total property portfolio at the end of 2014. The unrealised gain on that property amounted to €59 million. Then, the building located on Paseo de la Castellana, 33 in Madrid, where Mutua has its headquarters, is the second largest in the company’s portfolio by value. It has an appraisal value of €115 million, compared with a book value of €69.8 million.

The third building in the ranking is the Alfredo Mahou property in Madrid, which has a market value of €104 million and a book value of €29 million, i.e. has unrealised gains of €75 million.

Investment plan

Last year, Mutua Madrileña completed the investment plan it launched in 2008, which sought to modernise its properties to “convert them into flagship properties in the market. Through this, we created the distinctive Mutua Building”, explains the company in its annual accounts for 2014. The company also sought to reduce operating expenses (through this plan) to increase the appeal (of its properties) to clients.

The leased buildings generated revenues of €32.8 million for Mutua in 2014 and the company made investments amounting to €13.6 million during the year. Its occupancy rate last year was 90%, up from 88% in 2013.

Real estate investments accounted for 20% of the company’s total investments during the year, which had a market value of €6,654 million.

Original story: Expansión (by E. del Pozo)

Translation: Carmel Drake