UPDATE 3-Zurich braces for prop. loan losses in UK, Ireland

* Swiss insurer to increase provisions by $330 million

* Says has ended property lending in UK, Ireland

* Says UK, Irish property markets continue to deteriorate

* Zurich Financial shares down 0.5 pct

(Adds background, JP Morgan analyst quote, share reaction)

By Sven Egenter

ZURICH, July 16 (BestGrowthStock) – Swiss insurer Zurich Financial
Services AG (ZURN.VX: ) 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 (.SXIR: )
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. [ID:nN26205010]

Lenders’ concerns about the outlook for commercial property,
along with tough new banking rules in Europe, has prompted even
stronger lenders such as HSBC (HSBA.L: ) and WestImmo [WDLGW.UL]
to limit loans to the market. [ID:nLEE6HS000][ID:nLDE65F2CE]


JP 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 (ALVG.DE: ), 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

“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 Aug. 5. Both
subsidiaries remain adequately capitalised after a capital
injection from the group, Zurich said.
(Additional reporting by Daryl Loo; Editing by Hans Peters,
David Holmes and Andrew Macdonald)

UPDATE 3-Zurich braces for prop. loan losses in UK, Ireland