Fitch: U.S. Life Insurer Mortgage Performance Strong Amid Credit Concerns

Fitch Ratings, New York, said mortgage exposure for U.S. life insurers continued a run of strong performance in 2016 driven by low credit impairments.

The report, U.S. Life Insurers Mortgage Update, said overall credit quality of performing mortgages was high, with 59% rated with strong credit metrics and 32% rated with adequate metrics.

Fitch Director Nelson Ma said despite strong mortgage performance, U.S. life insurers could be exposed to credit concerns tied to aggressive underwriting in hotel and multifamily, which are further along the commercial real estate cycle. Other concerns include new construction in certain markets and an increasing amount of interest-only loans as a percentage of total loans.

“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,” Ma said.

The report said investment in mortgages grew by 7.5% in 2016 to $389 billion for life insurers in Fitch’s universe. Nearly 90% of life insurers in Fitch’s rating universe experienced some degree of growth in their mortgage portfolio. Mortgage allocations of life insurers for the industry have largely increased beyond historical allocations of between 8% and 12%, with the average allocation at 11.9% at year-end 2016.

The report also said one-fifth of companies in Fitch’s universe had mortgage allocations above 17%, which the agency views as above-average and potentially more vulnerable in a declining real estate scenario.

“A number of companies with above-average mortgage concentrations have a demonstrated track record of good performance within this asset class during the financial crisis,” Ma said. “Additionally, some of the life insurers with above-average concentrations to mortgages have well diversified mortgage portfolios by type.”

Fitch said companies with the greatest year-over-year increases in mortgage loans represented a mix of relatively newer entrants to the mortgage loan market and those with substantial mortgage holdings. While commercial mortgages remained the dominant type of new mortgage on a notional basis, the net growth rate of residential mortgages, particularly multifamily and single family, and mezzanine loans were strong in 2016. Commercial properties accounted for 74% of total mortgages, followed by multifamily mortgages at 13%.

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