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FOR IMMEDIATE RELEASE
OLDWICK - MAY 17, 2016 04:36 PM (EDT)
The challenging low interest rate environment remains a key concern facing the insurance industry. Many insurance companies are trying to maintain investment spreads as they put cash flow from premiums received, as well as maturing securities and interest incomes, to work.
According to a new Best Special Report, titled, “Mortgage Loans Continue to Increase, Adding Some Unlikely Participants,” A.M. Best has seen insurance organizations continuing to refine their investment strategies as they search for additional yield. To that end, some insurers that have not typically had material exposure to the mortgage loan asset class have been increasing their allocations. Historically, insurers with shorter-tail liabilities have taken most of their real estate or mortgage loan exposures in the form of commercial or residential mortgage-backed securities.
A.M. Best believes the L/A writers are at particular risk due to their increased dependence on net investment income to help support interest-sensitive liabilities. Overall, the L/A industry increased its mortgage holdings 8.1% in 2015 to $414.1 billion, the largest reported annual increase since 2007. This uptick has led to mortgage loans accounting for an increasing share of invested assets—10.9% in 2015 compared to 10.2% in 2014—a level not seen since 2008. To date, insurers that historically invested in mortgages have demonstrated disciplined mortgage underwriting practices as well as favorable performance. While the low interest rate environment has and will continue to place pressure on yields, mortgage loan returns have been more favorable than overall investment grade bond yields.
While the growth in mortgage loans is pronounced in the health-related composites, there has not been a significant shift within the industry. The largest investors within the insurance industry remain with the more interest-sensitive liability companies and their related composites.
Another interesting development over the last two years is the increasing allocation to residential mortgages. While residential mortgages have historically only accounted for less than two percent of the industry’s total mortgage loans, that allocation has increased from 1.3% in 2012 to 2.4% in 2014 and 3.3% in 2015.
Insurers have remained more selective regarding mortgage-loan originations and typically have a stricter underwriting process than most banks. This resulted in prudent investment decisions to scale back mortgage-loan originations in the years immediately after the financial crisis, as lending standards nationwide became more stringent and borrowers were perceived to be more risky. Since then, insurers’ commercial mortgage loan-related investment losses have been relatively modest.
A.M. Best remains committed to closely monitoring the trends within asset classes, focusing on areas that may have had more volatile results, such as the commercial mortgage-backed securities’ space through the financial crisis and in today’s environment of worry about deteriorating underwriting standards.
To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=248976 .
To view a video interview with A.M. Best Senior Industry Research Analyst Jason Hopper about the report, please visit http://www.ambest.com/v.asp?v=mortgageloans516 .
A.M. Best is the world’s oldest and most authoritative insurance rating and information source.