CRE Loans ‘Attractive Investment’ for Insurers

The U.S. life/annuity industry’s exposure to commercial real estate mortgages is growing because loans provide better returns than bonds, reported credit rating agency AM Best, Oldwick, N.J.

The report, Mortgage Loans Remain an Attractive Investment for Insurers, said the life/annuity industry’s investment in mortgage loans rose from $350 billion in 2012 to nearly $500 billion at year-end 2017. Life insurers and annuity firms now hold nearly 15 percent of the more than $3.1 trillion in commercial mortgage debt in the United States.

The report said 8-plus percent growth in each of the past three years pushed commercial real estate mortgages as a proportion of the segment’s total invested assets to 11.8 percent in 2017, the largest allocation since 2000.

“Overall, the performance of the life/annuity industry’s mortgage loan holdings has been solid,” the report said, noting less than 1 percent are consistently classified as “problem loans,” meaning 90-plus days delinquent or in the foreclosure process.

Insurers increasingly favor the multifamily sector; investments there rose 15 percent annually on average over the last four years and now account for more than 22 percent of insurers’ mortgage portfolios, up from 16.8 percent in 2013. Offices still constitute the largest share of insurer-held mortgage loans at 26.3 percent in 2017.

The insurance industry has seen its share of retail mortgages decline to from 24.3 percent in 2013 to just 21.7 percent I 2017, which the report attributed to the sector’s negative headlines and perceptions. In contrast, insurance company loans to industrial properties have grown over the last two years, up 15.9 percent in 2016 and 11 percent in 2017.

“The big risk for the commercial real estate market is that the growth in net operating income could slow down, thereby hurting borrowers’ ability to service debt and ultimately affecting cash flows,” the report said.

AM Best called the life/annuity industry’s exposure to commercial mortgage loans “significant,” but said the investments are well diversified geographically and by property type and are generally concentrated among a small group of larger insurers with experience in this asset class. “Additionally, investment losses from mortgage loans historically have been low compared with the losses incurred by such loans originated by banks and other lenders,” the report said.