Fitch: Life Insurers Well Positioned to Withstand Commercial Real Estate Exposure Risks

Fitch Ratings, New York, said the life insurance companies it has rated are well positioned to withstand the mounting challenges from rising losses and falling commercial real estate valuations.

“We expect financial metrics to remain within ratings sensitivities, as the insurers have well-diversified investment portfolios with stable CRE exposure,” Fitch said in a non-rating report, U.S., European Life Insurer Ratings to Withstand Risks from CRE Exposure.

The report noted U.S. life insurers’ CRE exposure comes predominantly from commercial mortgage loans, with more modest exposure to commercial mortgage-backed securities at less than 5% of cash and invested assets and equity real estate not a meaningful allocation. Mortgage loans comprised 13% of U.S. life insurers’ portfolios at yeqar-end 2022, approximately 85% of which were commercial mortgage loans. Fitch called these loans “largely high-quality and diversified,” with 90% of commercial mortgage loans rated CM1 or CM2 on an NAIC basis, along with de minimis troubled mortgages and an average loan-to-value ratio of 54% at year-end 2022.

“We expect to see continued deterioration in U.S. commercial mortgage loans as valuations decline and losses increase amid the worsening economic backdrop,” the report said. “Favorably, life insurers are generally conservative lenders with strong track records and diversified exposure by geography and property type. Life insurers’ portfolios are more conservatively positioned currently than entering the Global Financial Crisis, based on key risk metrics, during which cumulative aggregate default rates for our large-rated insurers was 4.4%. U.S. life insurers had 13% of their aggregate investment portfolios in mortgage loans, or 1.6x capital, at end-2022, which is above historic levels of 8%-12% but stable year-over-year.”

Fitch noted office and retail valuations are likely to drop further over the medium term, with office most pressured by reduced occupancy. “U.S. insurers have continued to de-emphasize these subsectors and are focusing on multifamily and industrial,” the report said. “We expect continued negative NOI growth for office properties in 2023, with office loan delinquencies within Fitch’s rated CMBS universe to double to 3.5% to 4.0% at end-2023 versus 1.8% in May.”

Both U.S. and European life insurers are subject to asset write-downs in real estate portfolios, the report said. “While Fitch does not view capital for U.S. life insurers to be overstated, it may be for some European issuers. In 2022, valuations of EU firms’ investment properties did not decline in tandem with quoted instruments, such as long-duration bonds and equities, despite widespread rises in long-term interest rates. However, insurers generally have ample liquidity and are therefore unlikely to have to sell real estate assets at distressed valuations. Most insurers that invest directly in real estate have a long holding period.”