Life Insurance Commercial Mortgage Return Index Dips

Trepp, New York, said commercial mortgage investments held by life insurance companies dipped in the first quarter after three consecutive positive quarters.

Lifeco mortgage investment returns varied considerably last year, from negative 1 percent in the first quarter when COVID-19 erupted to 4.58 percent in the second to 1.22 percent in fourth-quarter 2020, Trepp said.

In a new LifeComps report, Trepp Senior Vice President and Managing Director Tom Fink and Economic Data Analyst Jennifer Dimaano said life companies’ commercial mortgage investments posted a negative total return of -0.80 percent in the first quarter, a 1.65 percent decrease from the positive 1.22 percent return seen in late 2020. They attributed the negative total return to a -1.77 percent decline in reported loan values. Income returns remained positive and contributed 0.97 percent in the first quarter.

“Treasury yields have significantly increased this past quarter, which contributed to the decline in loan values,” Trepp said. The 10-year Treasury note yield rose to 174 basis points, a new high since the 192 basis point prior peak for the cycle seen in fourth quarter 2019.

On a rolling four-quarter basis starting in second-quarter 2020, income contributed 4.10 percent and appreciation added 2.71 percent for a 6.81 percent total return, Trepp reported.

Though lenders still display credit concerns, some measures of credit stress have come down from previous quarters, Trepp said. The overall delinquency rate held steady at 0.04 percent and lender deferrals and forbearance fell 12 percent quarter-over-quarter, with only $21 million in interest capitalized in the first quarter.

Of the major property types, industrial properties performed best over prior 12 months with an 8.10 percent total return, followed by multifamily at 7.81 percent, office at 7.04 percent and retail at 4.14 percent, the report said.

“There is a growing market concern for higher inflation in the near future,” the report said. “The same growing concerns could also increase borrower demand for life insurance company loans as borrowers look to take advantage of lower interest rates.”