Life insurers in search of yield have increased their focus on the commercial mortgage market, according to a new report by Fitch Ratings. This led to a record $77 billion of new mortgages originations in 2013. Net mortgages increased only 4.4%, or $13.8 billion, due in part to greater runoff of existing mortgages. Fitch expects new mortgages originated by life insurers in 2014 to exceed 2013 levels.
Mortgage performance for the Fitch universe was again very good in 2013 as nonperforming loans and delinquencies remain very low and real estate acquired in satisfaction of debt declined. Troubled mortgages are very low and increased only to 0.4% from 0.3% due to a modest increase in restructured mortgages. Impairments were at a four-year low and are expected to remain low under Fitch's base case assumption.
More life insurance companies increased their allocation to commercial mortgage loans as an alternative to lower yielding bonds. Mortgage allocation was in the 8%-12% range of general account investment portfolios for many insurers. The market continues to be dominated by the larger life insurers, especially the large mutual companies with greater allocations in the 12%-15% range.
Mortgage portfolio yields declined to 5.75% in 2013 from 6.06% for 2012, but remain attractive from a yield standpoint versus 'BBB' rated bonds. Many life insurance companies likely would have put more money to work in the mortgage sector but were outbid by increasing demand from other insurance companies as well as increased competition from conduits as the commercial mortgage-backed securities (CMBS) market continues to rebound.
Fitch's U.S. cumulative default rate for fixed-rate CMBS loans is predicted to be relatively stable given the improving commercial real estate property fundamentals. Overall CMBS loan delinquencies have declined to approximately 4.9% at the end of the second-quarter 2014, the lowest level since 2008. Concerns about more aggressive underwriting, higher leverage and weaker loan structures have taken center stage in 2014 related to new issuance.
Generally, the real estate sector fundamentals continue to build on the positive trends observed in recent years. However, new construction in certain property types, such as multifamily and hotels, bear watching. In the report, Fitch reviews the fundamentals for various commercial property types including multifamily, retail, office, industrial and hotels with a focus on rent growth and vacancy.
The full report 'U.S. Life Insurers Mortgage Update' is available at 'www.fitchratings.com' under 'Insurance' and 'Special Reports'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research: U.S. Life Insurers' Mortgage Update (Commercial Mortgages in High Demand)
- Security Upgrades & Downgrades
- Fitch Ratings
- commercial mortgage
Andrew Davidson, CFA, +1 312-368-3144
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Douglas Meyer, CFA, +1 312-368-2061
Brian Bertsch, +1 212-908-0549