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Life Insurers’ Property Loans to Set Record for Worst Returns

Life Insurers’ Property Loans to Set Record for Worst Returns



Life insurance companies may be feeling a bit sickly about real estate.

They are enduring the worst returns in two decades on property mortgages, according to Trepp, a data provider that tracks securitized mortgages.

Trepp’s index for life insurance returns is down 11.8 percent year-to-date. This will be the worst year for life insurers since Trepp started collecting the data in 2008. It’s not a crypto-like crash, but insurers count on such investments to deliver steady, if unspectacular, returns.

The index is closely watched because life insurance companies account for 12 percent of all commercial real estate lending, according to Trepp. If life insurers pull back it could significantly affect financing for major real estate projects, as many bank lenders have also retreated to the sidelines.

But while life insurance returns are down, it is not Armageddon. There has yet to be widespread distress or cash flow problems at the properties backing the loans.

“We haven’t seen big credit problems emerging,” said Matt Anderson, managing director at Trepp.

The bigger issue is that higher interest rates have led to lower valuations across fixed income as a whole. Government and corporate bonds have both been stinkers of late. Life insurance is no different.

Higher interest rates have lowered valuations on properties backing the loans held by life insurers because future cash flows are being discounted, Trepp said.

Anderson noted, however, that life insurers have yet to officially record these negative returns. Insurers plan to hold their loans on their books instead of writing them down immediately as a loss. So while a negative return looks scary, it is not yet cause for alarm.

“Their intent is to hold through the term of the loan,” said Anderson.

But it will be another matter if properties backing the loans fall into distress.

If foreclosures ramp up or properties can’t produce enough cash flow, life insurers will be hit with a one-two punch as they are already battling higher interest rates. This could not only lead to even lower returns for life insurance investors, but it could also force life insurers to pull back on lending.

So far, life insurers are continuing to make new loans. In the second quarter, life insurers’ commercial mortgage portfolios grew at an annual rate of 9.1 percent, according to Trepp.

“Capital flows into life company mortgage lending have been strong,” Trepp said. “Borrower demand has remained strong.”

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