Fitch Ratings: Life Insurers Can Withstand Commercial Real Estate Deterioration

Fitch Ratings, New York, said U.S. life insurers’ ratings are not currently at risk from commercial real estate exposure, due to insurers’ stable investment portfolios, conservative underwriting, strong liquidity and effective asset-liability management.

“We expect any commercial real estate losses to remain within ratings sensitivities, given the strength of diversified portfolios, despite our expectation for monetary policy to lead to a mild recession in the first half of next year,” Fitch said in a non-ratings commentary released this week.

Fitch noted U.S. life insurers’ commercial real estate exposure is largely commercial mortgages, with commercial mortgage-backed securities representing less than 5% of cash and invested assets and non-meaningful allocation to equity real estate. Mortgage loans made up 13% of U.S. life insurers’ portfolios at year-end 2022, above historic levels but stable year-over-year. Approximately 85% were commercial mortgage loans, 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.

The report noted office properties in particular are under pressure in urban areas due to enduring remote work trends. “However, overall loan losses remain near historical averages,” Fitch said. “Office property valuations are being pressured from low occupancy, rising rates and lower rent, increasing the potential for defaults. However, Fitch expects a majority of near-term maturing office loans to be extended rather than paid off.”

Fitch projected that office mortgages will continue to deteriorate into 2024. “Hotel and retail segments are performing relatively better, as hotels benefitted from resurgence of summer travel, while retail has had little to no additional construction the last decade, though brick-and-mortar retail has been stressed by the movement toward e-commerce,” the report said.

Life insurers’ significant capital reserves and short-term liquidity make them unlikely to need to sell real estate assets at distressed valuations, Fitch said. “Most insurers that invest directly in real estate have a long holding period,” the report said. “Surrenders have remained at or below pricing expectations, given robust surrender charge protection and strong asset-liability management mitigating risks. Rising rates are also expected to continue to reduce investment maintenance reserve balances for U.S. life insurers, but strong liquidity and effective asset-liability management will mitigate the negative effects on statutory capital and cash flows.”