Fitch Ratings: Life Insurers Have Significant Commercial Mortgage Default Headroom
Fitch Ratings, New York, said potential stress on U.S. life insurers’ commercial mortgage portfolios will not drive rating downgrades, given the industry’s strong capitalization, current loan quality and historical loss experience.
Commercial mortgage loans make up nearly 13 percent of life company’s total invested assets.
Fitch estimated the top 15 U.S. life insurers by commercial mortgage loan exposure could absorb an aggregate default rate of nearly 60 percent given their current level of capital headroom. This would represent roughly 14 times the aggregate default rate experienced cumulatively by these insurers during the 2008-2010 Great Recession.
Commercial mortgage loan delinquencies peaked at 30 basis points during the Great Recession, compared with peaks exceeding 850 basis points for commercial mortgage-backed securities and bank-originated loans. “The quality of commercial mortgage loans held by U.S. life insurers has only deteriorated modestly in recent years and remains strong [compared with the Great Recession],” Fitch said.
The substantial cushion between the rating headroom default rate and the Great Recession default rate primarily reflects the “robust” capitalization across the life insurance industry and favorable historical performance of the life insurers’ commercial mortgage loan portfolio, the report said. “This favorable performance is a result of the high quality of the underlying loans,” Fitch noted. Losses taken on commercial mortgage loans were relatively modest in 2020, but could increase between now and 2023, Fitch said.
Hotel and retail have accounted for most losses since the pandemic began, in part because hotel rates often reset daily and retail properties were especially hard hit by pandemic-related social distancing guidelines and shutdowns. Office properties remain vulnerable to a prolonged downturn, especially if there is a large-scale shift toward remote working that could shrink demand for office space in the longer term, Fitch said.
“While long leases have protected office cash flows over the near term, valuations could remain pressured over the intermediate term due to increasing vacancies pressuring same property net operating income and increased capitalization rates,” the report said.