US life insurers to withstand CRE deterioration

Written by Adam Cadle

05/10/2023

Ratings of US life insurers are not currently at risk from commercial real estate (CRE) exposure, given stable investment portfolios comprised of high-quality, diversified exposures, conservative underwriting, strong liquidity, and effective asset-liability management (ALM), Fitch Ratings said.

US life insurers’ CRE exposure is largely comprised of commercial mortgages, with commercial mortgage backed securities (CMBS) representing less than 5% of cash and invested assets and non-meaningful allocation to equity real estate. Mortgage loans comprised 13% of US life insurers’ portfolios, or 1.6x capital, at YE22, above historic levels of 8%-12%, but stable YOY. Approximately 85% were commercial mortgage loans (CML), with 90% of CMLs rated CM1 or CM2 on an NAIC basis, along with de minimis troubled mortgages and an average loan-to-value ratio of 54% at YE22.

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

It added: “Life insurers’ significant capital and short-term liquidity make them unlikely to be forced sellers of real estate assets at distressed valuations.

“Most insurers that invest directly in real estate have a long holding period. Surrenders have remained at or below pricing expectations, given robust surrender charge protection and strong ALM mitigating risks. Rising rates are also expected to continue to reduce investment maintenance reserve (IMR) balances for US life insurers, but strong liquidity and effective ALM will mitigate the negative effects on statutory capital and cash flows.”

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