Life Insurers' Strong Commercial Mortgage Performance Likely to Continue

Michael Tucker

June 29, 2018

Relatively stable commercial real estate fundamentals should drive strong investment results for U.S. life insurers over the next 12 to 24 months, said Fitch Ratings, New York.

The agency's U.S. Life Insurer's Mortgage Update called life insurers' mortgage loan loss experience "very favorable" over the past year, "as evidenced by low credit impairments and a low percentage of troubled mortgages."

The overall credit quality of performing lifeco mortgages remains high. The National Association of Insurance Commissioners reported 61 percent earned "strong" credit metrics and 34 percent earned "adequate" metrics. The Mortgage Bankers Association found life insurance company loans have one of the lowest delinquency rates among major investor groups. Life company portfolios that were 60 or more days delinquent fell 0.01 percentage points during the first quarter to 0.02 percent. 

"Favorable credit metrics have benefited from a stable economic recovery in recent years, generally modest levels of new construction and low interest rates," the Fitch report said.

Fitch noted some credit concerns remain, including more aggressive underwriting in the hotel and multifamily sectors--both of which are further along the commercial real estate cycle than other sectors--new construction in some markets, retail properties with challenged anchor stores, increased exposure to single tenants in commercial mortgage-backed securities and a continued increase of interest-only loans as a percentage of total loans.

Life company investment in mortgages grew 8.4 percent in 2017 to $422 billion compared to 2016's 7.5 percent growth rate, Fitch said. "Investment in mortgage loans over the last three years for life insurers were above historical growth rates for the industry as life insurers continue to increase allocation to less liquid asset classes in search for yield. Fitch expects this trend to continue over the near term."

Fitch said the companies with the greatest year-over-year increases in mortgage loans included a mix of relatively newer entrants to the mortgage loan market and those with a long presence in the market. Commercial real estate mortgages accounted for the lion's share of total mortgages at 73 percent followed by multifamily mortgages at 14 percent.

"The real estate sector fundamentals continue to build on the positive trends observed in recent years," Fitch said. "However, certain markets with significant exposure to oil and gas or large amounts of new construction could face challenges in the coming years."

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