LifeCo Commercial Mortgage Returns Up in First Quarter

Returns on life company commercial mortgage investments rebounded in the first quarter to generate a 1.60 percent total return, the LifeComps Commercial Mortgage Index, Boston, reported.

Life company commercial mortgage investments had lost 2.72 percent in the fourth quarter, LifeComps said.

Income contributed 1.12 percent while price added 0.48 percent in the quarter, LifeComps reported. “Price return benefitted from Treasury yield curve movement and other valuation factors including spread movement, credit migration and portfolio growth,” the report said, noting that the yield curve shifted upward for terms under three years while the benchmark ten-year Treasury fell five basis points over the quarter.

The 12-month total return fell to 2.15 percent from 3.94 percent in the prior quarter as strong returns in first-quarter 2016 rolled out of the calculation, LifeComps said. Annual income of 4.62 percent was countered by -2.47 percent price return. Higher Treasury yields and other valuation factors hindered annual price performance.

Of the four major property types, apartment loans fared best for the quarter with a return of 1.74 percent compared to 1.59 percent for retail and 1.49 percent for both office and industrial, LifeComps said. For the year, industrial performed best with a return of 2.29 percent followed by apartments at 2.24 percent, office at 2.00 percent and retail at 1.95 percent.

The LifeComps Commercial Mortgage Loan Index examines mortgage loan cash flow and performance data on 5,300 active loans with a $122 billion aggregate principal balance. Participating life insurers include Allstate Life Insurance Co., CIGNA Investment Management, AXA Equitable, John Hancock, Northwestern Mutual, Principal Financial, Prudential Insurance Co. of America, Sun Life and TIAA.

Fitch Ratings, New York, said life insurance company mortgage exposure continued its strong performance run last year, driven by low credit impairments. Life company mortgage investment grew 7.5 percent in 2016 to $389 billion for life insurers in Fitch’s universe, down slightly from 2015’s 7.7 percent growth rate.

“Investment in mortgage loans over the last two years by life insurers was above historical growth rates for the industry as life insurers continue to trade liquidity for yield,” said Fitch Ratings Director Nelson Ma.

Despite strong mortgage performance, U.S. life insurers could be exposed to credit concerns tied to “aggressive” underwriting in the hotel and multifamily sectors–which are further along the commercial real estate cycle than other sectors–Fitch said. Other concerns include new construction in some markets and increasing interest-only loan originations.

In 2016, nearly 90 percent of life insurers in Fitch’s rating universe grew their mortgage portfolio. Traditionally, LifeCo mortgage allocations ranged between 8 percent and 12 percent; the average allocation equaled 11.9 percent at year-end 2016. Nearly one-fifth of insurance companies Fitch examined had mortgage allocations that exceeded 17 percent, which Fitch views “potentially vulnerable” in a declining real estate scenario.