How are competitors reacting to the temporary measure?: Why is Zurich Insurance stopping the issuance of new mortgages?

Zurich Insurance’s Swiss subsidiaries are not just any other on the market: Zurich Life is the number six Swiss insurer in the mortgage market and Zurich’s property insurance is number ten, according to data from supervisory authority Finma. Both companies had a mortgage portfolio of almost 3 billion francs on their books at the end of 2022.

The decline in Zurich is “pretty special”

According to Lukas Vogt, managing director of mortgage broker Moneypark, Zurich’s temporary retreat is no surprise: “Mortgage offers of many insurance companies fluctuate, mainly depending on the balance sheet size,” says the expert. In other words: If an insurance company grows and has to make a lot of new investments, it increases its offer in the mortgage business. If the insurance business grows less or there are more interesting investment alternatives than mortgages, insurers will scale back the business.

For this reason, it is common for individual insurance companies to temporarily halt new business. Vogt does not want to name any names. “Zurich’s current pullback is quite special as other insurers are competing quite aggressively for new business at the moment.”

In fact, no other well-known insurance company is currently planning to follow Zurich’s example. Helvetia, Mobiliar, Axa, Allianz, Baloise and Swiss Life have all announced that they want to continue issuing new mortgages. “Mortgage investments are part of our strategic asset allocation, the proportion of which has increased in recent years,” explains Swiss Life, for example. At almost 12 billion francs, the life insurer has by far the largest mortgage book of all insurers.

In the megamarket of mortgages, the insurance industry often acts as an opportunistic niche provider. Generally speaking, the industry’s market share is only 3 percent. Cantonal banks take the first place with 37 percent. Insurers lost almost 3 per cent of mortgage volumes between 2021 and 2022, according to Moneypark.

Reasons for temporary suspension

Particularly in the period of negative interest rates, Swiss insurers have turned to the mortgage market, sometimes offering competitive terms. Life insurers in particular sometimes have to find investments in francs with a maturity of twenty to thirty years; but that’s not much. Long-term Swiss government bonds brought them losses. Mortgages secured by Swiss real estate were a good alternative.

However, since the reversal in interest rates, the world has taken on a different look again. Ten-year Swiss federal bonds currently yield at least 0.7 percent. Ten-year mortgages are currently around 2.5 percent, according to Moneypark.

So why is Zurich stopping its new business? One reason for this may be that the interest rate environment is a bit topsy-turvy right now. Investors generally get a higher interest rate if they lend their money for a longer period of time. Currently, the situation is the opposite: short-term interest rates are higher than long-term interest rates. This phenomenon is called an inverted yield curve.

Specifically: The Sarong interest rate at which banks borrow short-term liquidity is currently 1.7 percent. On the other hand, the federal bond yield is only 0.7 percent. Including the interest margin of about 1 percentage point – the exact value depends on the provider – Saron mortgages cost about 2.5 per cent, which is about the same as ten-year loans.

In other words, long-term mortgages are currently not very attractive to providers such as insurance companies. But that’s exactly what life insurers need to have an investment that covers their long-term liabilities.

Is Zurich waiting for the next interest rate reversal?

An inverted yield curve is an expression of investors’ expectations that an economic downturn is imminent, and as a result the central bank will lower the key interest rate to make borrowing cheaper and thus reignite the economy. The Swiss National Bank’s (SNB) next interest rate decision will be on March 21. However, most economists do not expect the SNB to cut interest rates yet. First of all, it should wait for the ECB to take appropriate steps.

Against this background, Zurich Switzerland may want to wait until long-term interest rates in Switzerland pick up again and thus making long-term loans becomes more valuable to him as a mortgage lender.

Another reason for stopping new business could be regulatory restrictions. Because insurers cannot add mortgages to their balance sheets as they wish, there are limits. “Typically insurers put 5 to 10 per cent of their investment into mortgages,” says Moneypark boss Vogt. It is therefore conceivable that Zurich has already invested the maximum possible amount in mortgages.

The mortgage market is not only the largest but also the most competitive credit market in Switzerland. Anyone who gets “njet” from a provider as a customer will probably never get information there again. So it will be exciting to see how long Zurich Insurance, Switzerland’s largest insurance group, will stay on the sidelines in the mortgage market.