Life Insurance Commercial Mortgage Index Drops Steeply

Trepp LLC, New York, said life insurance company mortgage returns dropped steeply during the first quarter as declining interest rates could not offset growing credit concerns.

Commercial mortgage investments held by life insurance companies posted a -1.00 percent total return in the first quarter, down significantly from a 0.55 percent return in fourth quarter 2019 and 2.2 percent in the third quarter.

For full-year 2019, the total return for commercial mortgage investments held by life insurance companies equaled 9.3 percent, the Trepp LifeComps Commercial Mortgage Index reported.

“Despite the significant drop in Treasury yields, credit concerns materially pushed down the value of the loan portfolios,” said Trepp Head of Data Consortia Initiatives Russell Hughes.

Hughes noted credit performance remains strong with no loan in the index delinquent as of March 31, but said expectations about future credit performance is reflected in the specific reserve levels for these portfolios, which increased more than 300 percent from year-end 2019. “While these loans are among the highest in credit quality across the commercial real estate industry, they are not immune to the disruptions that the economy is currently experiencing,” he said.

Of the major property types, multifamily properties performed best over the past 12 months with a 5.1 percent total return, followed by office at 4.9 percent and both retail and industrial at 4.57 percent.

Income contributed 1.03 percent and price subtracted 2.04 percent in first quarter 2020, with the negative price trend primarily driven by credit risk, Trepp reported.

Over the past four quarters, income contributed 4.40 percent while price added 0.49 percent for a 4.90 percent total return. Declining Treasury yields drove price gains before the coronavirus-related economic shock; the yield on the 10-year Treasury ended the first quarter at a record-low 70 basis points.

The LifeComps Index tracks 7,600 active loans with a $148 billion aggregate principal balance. The weighted-average duration equals 5.4 years and the average loan-to-value ratio is 51 percent.