Trepp: 2022 Life Insurance Mortgage Returns Worse Than 2008

Trepp LLC, New York, said its life LifeComps index of insurance company commercial mortgage investments saw a -10.1% return in 2022, largely due to a -14.3% appreciation return.

“This is six percentage points worse than the previous record low seen in 2008,” said Benqing Shen, Director of Product Management with Trepp. “On the brighter side, as argued last quarter, the commercial mortgage loans may have seen their valuations bottom out in Q4. On a quarterly basis, the loans saw a slight improvement in total returns, with a positive return of 1.9%.”

The Trepp LifeComps Total Return Index said the Federal Reserve’s interest rate increases started to moderate in the fourth quarter, with a 75 basis point hike in November followed by a 50 basis point increase in December and a 25 basis point rise in January. “In the fourth quarter, the market has seen some positive news of a possible economic soft landing, with strong signs coming from the labor market as well as indications of disinflation,” the report said. The 10-year Treasury rate started and ended the quarter close to 3.8%

“If this trend continues, and judging from the LifeComps portfolio returns, one may start to wonder if the commercial mortgage market has turned the corner and if the worst is in its rear mirror,” Shen said. “It is tempting to say yes, but the answer is still largely dependent on the Fed’s policy and the terminal Fed Funds rate by the end of the rate hikes.” He noted mixed signals in inflation data have sent interest rates up again and the market is pricing in another 50 basis point increase at nearly 20% probability. “If the Fed is more hawkish than people expected at the beginning of the year, then the market can expect a negative impact on commercial mortgage returns,” he said.

Looking at the primary market, the LifeComps portfolio saw just 117 new loans funded in the fourth quarter, a 26% decrease quarter-over-quarter and a 56% decrease year-over-year. Trepp attributed the low loan origination volume primarily to high interest rates. The average coupon on mortgage loans originated in late 2022 rose to 5.32%, 50 basis points higher than in the third quarter.