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Best’s Special Report: With Commercial Real Estate Values Near All-Time Highs, Insurers Remain Diligent Mortgage Underwriters


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FOR IMMEDIATE RELEASE

OLDWICK - DECEMBER 08, 2017 11:48 AM (EST)
U.S. life/annuity (L/A) insurers have increased their mortgage loan holdings for six consecutive years, with jumps of more than 8% in 2015 and 2016—representing 10-year highs, according to a new A.M. Best report.

The Best’s Special Report, titled, “Commercial Real Estate Values Near All-Time Highs, Insurers Remain Diligent Mortgage Underwriters,” notes that L/A insurers have exposure to commercial real estate in various ways—including actual real estate, commercial mortgage-backed securities (CMBS) and structures containing real estate/mortgage loans. Mortgage loan issuances are the sector’s predominant exposure, as returns have been more favorable than that provided by bond portfolios.

According to the report, the majority of the industry’s commercial mortgage lending is concentrated in major metropolitan areas in central business districts, as real estate in these markets tends to be of high quality and particularly unlikely to default because of strong tenant and owner profiles. Office buildings comprise 31% of the mortgage loan distribution held by L/A insurers, followed by retail (24%) and apartment buildings (21%). Apartment building mortgage issuances have increased 53% since 2013. The report also notes that the L/A industry has approximately $11.6 billion worth of mortgages derived in Houston, as well as other metropolitan areas heavily affected by Hurricane Irma.

The big risk for the commercial real estate market is that the growth in net operating income could slow down, deteriorating the debt service coverage ability of borrowers and ultimately affecting the cash flow from this asset class. Continued growth in net operating income for borrowers includes the headwinds of potentially rising interest rates, tighter lending standards and continued economic challenges regarding wages and employment.

While the L/A segment does have heightened exposure to commercial mortgage loans, these investments remain well-diversified among geographic and property type and are generally concentrated among a small group of larger L/A insurers experienced in this asset class. Insurers have remained disciplined with regard to mortgage loan underwriting standards, and have a track record of reporting fewer problem loans and delinquencies than other mortgage loan originators, such as banks. Problem loans, including those restructured, have not exceeded 1% of total mortgage loan holdings for the entire L/A industry since at least 2004.

A.M. Best will remain diligent in reviewing portfolios for diversification across property type and geography, along with other fundamentals such as average loan size, frequency and source of property valuations.

To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=268674 .

A.M. Best is the world’s oldest and most authoritative insurance rating and information source.