Commercial mortgages gain larger role in US L/A annuity insurers’ investment portfolios

Written by Adam Cadle

22/07/2024

US life/annuity insurers continued to increase allocations to commercial mortgage loan portfolios in 2023, but problem loans, including those 90 days delinquent, again rose sharply, according to AM Best.

L/A insurers expanded their allocations to mortgage loans last year by more than 6% to $734.2bn, with mortgages now accounting for 13.5% of the segment’s investment portfolios. New acquisitions were fuelled largely by multi-unit (28%), residential (26%), and industrial property loans (18%), accounting for over 70% of new acquisitions in 2023.

“Although yields rose in 2023, so did the number of problem loans, which have been climbing steadily since 2020, and were up by nearly 44% in 2023,” said Jason Hopper, associate director, AM Best.

“The total amount of mortgages 90 days delinquent doubled, while those in the process of foreclosure were 63% higher than in 2022.”

According to the report, office properties account for more than a quarter of overdue loans and those in foreclosure and almost half of those that have been restructured but constitute just 17% of total mortgage portfolios. Office loans have recently faced headwinds due mainly to the impact of the pandemic and more people working remotely either full time or on a hybrid schedule.

The report also noted that the quality of mortgages in good standing continued to deteriorate in 2023, as economic conditions impacted debt service coverage and loan-to-value ratios. “This had resulted in a fallen angels scenario that happens when loans migrate down the credit scale,” Hopper said.

“This trend is likely to continue until the market becomes more stable as a result of interest rates and loan maturity.”

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