Best’s Special Report: Mortgage Loans Remain an Attractive Investment for Insurers

The U.S. life/annuity (L/A) industrys exposure to commercial mortgage loans has become a material portion of the segments overall investments, as yields still are providing better returns than bonds, according to a new AM Best report.

The Bests Special Report, titled, Mortgage Loans Remain an Attractive Investment for Insurers, states that the L/A industrys investment in mortgage loans has risen to nearly $500 billion at year-end 2017 from $350 billion in 2012, and that the L/A industry now holds approximately 15% of the roughly $3.14 trillion commercial mortgage debt in the United States. Growth rates of around 8.5% in each of the last three years have pushed mortgages as a proportion of the segments total invested assets to 11.8% in 2017the largest allocation since 2000from 9.8% in 2011. Overall, the performance of the L/A industrys mortgage loan holdings has been solid, with less than 1% consistently classified as problem loans (i.e., those that are delinquent 90 days or more or in the process of foreclosure or have already been foreclosed).

Apartment buildings have been a focus for insurers, with investments rising by an average 15% annually over the last four years and now accounting for over 22% of insurers mortgage portfolios, compared with 16.8% in 2013. Offices still constitute the largest share of insurer-held mortgage loans, even though the growing focus on other property types has led to a decline in the allocation to 26.3% in 2017 from more than 29% in 2013. The insurance industry has seen its share of retail mortgages decline to 21.7% in 2017 from 24.3% in 2013, likely attributable to the effect of negative headlines and perceptions.

In contrast, the proportion of industrial property loans has grown over the last two years, up 15.9% in 2016 and 11% in 2017. The big risk for the commercial real estate market is that the growth in net operating income could slow down, thereby hurting borrowers ability to service debt and ultimately affecting cash flows. The last decade has seen an increase in insurers appetite for residential mortgages, with holdings more than quadrupling to $20.2 billion in 2017 from $5 billion in 2008.

Although the L/A segments exposure to commercial mortgage loans is significant, these investments are well diversified geographically and by property type, and are generally concentrated among a small group of larger L/A insurers with experience in this asset class. Additionally, investment losses from mortgage loans historically have been low compared with the losses incurred by such loans originated by banks and other lenders.

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Jason Hopper
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Behrmann, CFA, CAIA, ChFC, CLU

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