Life Insurers' CRE Mortgage Exposure Grows

Michael Tucker mtucker@mba.org

July 17, 2019


Fitch Ratings, New York, said U.S. life insurers' exposure to mortgages increased to nearly 13 percent of invested assets at year-end 2018, up from 12.4 percent a year ago.

The figure exceeds life insurers' traditional 8 percent to 12 percent historical allocations, Fitch said, noting the increase in the average mortgage loan allocation continues an industry-wide trend over the last four years.

"Insurers continued to see relative value in mortgages compared with other asset classes and are driving exposures higher as they trade liquidity for yield," said Fitch Ratings Director of North American Insurance Nelson Ma.

The Fitch report, U.S. Life Insurers' Mortgage Update: Mortgage Growth Unabated; Real Estate Fundamentals Stable, but Concerns Remain, said life insurers' net investment in CRE mortgages grew by 8 percent over the last five years. "The large public stock and mutual life insurers continue to dominate life insurer participation in the commercial mortgage market and comprise much of the top 10 insurers by mortgage loan exposure," the report said. "Interestingly, strong growth was experienced in 2018 for life insurers outside the top 10 as the share of mortgage acquisitions made by these life insurers grew."

Fitch said it expects that relatively stable commercial real estate fundamentals will continue to drive strong mortgage performance for U.S. life insurers over the next 12 to 24 months.

"Loss experience on life insurers' mortgage loan investments has been very favorable over the past year given continued low credit impairments and a low percentage of troubled mortgages," the report said.

The overall credit quality of performing mortgages remained high in 2018 but weakened somewhat relative to last year as some CM1 loans (with strong credit metrics) fell into the CM2 category (with adequate metrics). Lower-rated mortgages remained constant at 5 percent last year. "Favorable credit metrics have benefited from stable economic conditions, low interest rates and generally modest levels of new construction in most markets," the report said.

Underwriting has remained generally disciplined, but key credit concerns include an increase in shorter-term loan funding on more transitional assets from the bridge loan or commercial real estate collateralized loan obligation space as well as the continued prevalence of interest-only loans as a percentage of total loans, Fitch said. "In addition, new construction in certain markets and retail remain a concern," the report said, noting the retail sector accounted for most loan defaults last year. Fitch said it expects this trend to continue as the shift to e-commerce hurts brick-and-mortar retailers. "Store closings in first-half 2019 have already eclipsed closings in all of 2018," Fitch said.

Life insurers' net investment in commercial mortgage-backed securities increased eight percent during 2018 to $133 billion--four percent of cash and invested assets, Fitch said. Nearly half of the life insurers Fitch studied saw double-digit growth in their CMBS portfolios, partially offsetting nearly 20 percent of life insurers with double-digit net declines in CMBS exposure. CMBS loan delinquency rates are currently at their lowest level in a decade, driven by the strong economy, a very liquid financing market and the active resolution of legacy assets, the report said.

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