According to Fitch Ratings, life insurers are likely to experience higher losses on their commercial mortgage investments in the COVID era than in the great recession, reflecting the severity of the pandemic.
Using Fitch's base case assumptions, the rating agency expects life insurers' commercial mortgage loan losses to be 180 basis points of total outstanding credit balance, an increase of 50% over the level during the global financial crisis. The timing of losses is subject to government leniency measures that may extend into the next year. Fitch assumes at the earliest that these will appear in the legal statements of the life insurers for the third quarter.
Life insurers finished the second quarter 15.3%, or $ 573.9 billion, of the total of $ 3.8 trillion in outstanding commercial and multi-family mortgages. This makes them the third largest group of investors, reported the Mortgage Bankers Association.
Multi-family home-secured loans account for 31% of mortgage investments by life insurance companies, followed by offices for 27% and retail stores for 19%. The MBA reported that life insurers hold $ 167.2 billion in multi-family debt, which is 10.4% of the total outstanding amount for that type of property.
"On average, US life insurers granted 9% of commercial real estate mortgages through outstanding amounts relief measures," the Fitch press release said. "Personal and hotel borrowers accounted for 52% and 26%, respectively, of all life insurance mortgage loans with approved relief measures."
However, hotel-secured loans only make up 4% of life insurers' mortgage holdings, resulting in much less exposure than their retail portfolio.
Fitch's negative outlook for life insurers comes from the exposure to losses on all of their investments, including commercial mortgage loans. While life insurers' commercial mortgage credit metrics are high, as measured by the National Association of Insurance Commissioners, their credit quality has declined for the second year in a row, indicating a weaker trend, the rating agency added.
Given the large proportion of office real estate held by life insurers, the performance of these loans will continue to be a problem for Fitch.
"The office space is expected to face cyclical pressures in the short term, with greater uncertainty in the longer term, as the net effects of the pandemic remain unclear, such as increased work from home versus the need for more office space per employee and its impact on demand for office space, especially in urban areas, "said the rating agency.
Although Fitch previously reported that the default rate on commercial mortgage-backed securities was down 22 basis points from July to 4.76% in August, it stuck with its previous forecast, which predicted defaults will range between 8.25% and through the fourth quarter If this is not the case, a material increase in forbearance activity will be 8.75%.