US L/A insurers increase mortgage loan holdings by 8%

Written by Adam Cadle

21/09/2023

US life/annuity (L/A) insurers increased their holdings in mortgage loans by 8% in 2022, reaching $691.2bn, according to AM Best.

AM Best stated that this segment has been expanding its allocations to mortgage loans for the past decade, and the majority of this growth came from commercial mortgage loans, which increased to $605.5bn in 2022, up from $570.1bn a year earlier.

“Because of persistently low interest rates prior to 2021, commercial mortgage loans were offering more attractive yields than investment-grade quality bonds, AM Best senior industry research analyst David Lopes said.

“Shifting allocations to mortgage loans helped mitigate the spread tightening between liabilities and assets.”

AM Best said that multiple economic forces are posing challenges for L/A insurers’ mortgage loan portfolio managers. The pandemic accelerated the shift to employees working from home, making office space unnecessary in certain instances, which led to a rise in vacancy rates. Furthermore, interest rates have risen steadily since March 2022, which makes borrowing more expensive and drives down demand.

“The share of office properties in mortgage portfolios continues to decline and accounted for only 11% of newly issued mortgages in each the last two years, less than half the level in 2018,” Jason Hopper, associate director at AM Best, said. “The industry’s mortgage portfolio allocation to office properties dropped to 21% in 2022, from over 26% in 2018.”

US insurers have shifted their investments toward multi-unit/apartment properties, which now account for roughly 30% of the industry’s mortgage loans.

Since 2019, problem mortgage loans have grown nearly 77%, to over $4.5bn, but are still less than 1% of capital and surplus. Despite making up only 8.5% of all mortgages owned by L/A insurers, residential mortgage loans account for more than 77% of all problem mortgages.

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