WASHINGTON, DC-Insurance companies, not known for rushing headlong into risky investment waters, have benefited lately from both their own prudent management of commercial mortgage risk and improving CRE fundamentals. So say the CRE Finance Council and Trepp LLC, which last week released the results from the latest Trepp/CREFC Portfolio Lender Survey of commercial mortgage performance within the insurance sector, which has a combined $135 billion of exposure to commercial mortgage assets.
As evidence, the survey found that total realized losses from the commercial mortgage holdings of participating companies shrunk to a mere five basis points, and no company withstood realized losses of greater than 1%. It’s a loss rate typically associated with very high-quality corporate bonds, according to CREFC and Trepp.
Further, the severity of realized losses for insurance companies at year-end 2012 averaged only 7.7% of the par balance for first mortgage investments. That’s down 1.49% from year-end 2011, and ranged from a high of 12.94% for retail to 3.17% for multifamily. ??
Total loan delinquencies—i.e. late pays of 30 days or greater—averaged 0.35% among participating companies within their general account holdings and subsidiary entities. The figure is down eight bps from year-end ’11, say CREFC and Trepp.
“These results provide clear evidence of extremely solid investment performance within insurance company portfolios,” says Todd Everett, managing director and head of real estate fixed income at Principal Real Estate Investors and chair of CREFC’s Portfolio Lenders Insurance Company Sub-Forum, in a release. “They also demonstrate the reasons we are seeing increasing allocations in commercial mortgages from this sector.” He adds that the lowering level of losses and minor levels of high risk “seem to indicate that insurance companies are benefitting from the recovery in real estate fundamentals.”
The average commercial mortgage loan-to-value held within participating company portfolios is 59.1% at the end of last year’s second quarter. About 3% of loan exposure for all companies is above a 100% loan-to-value. The average debt service coverage ratio within portfolios is 1.8X. Also, 93.0% of all exposure held was above a 1X DSCR. These figures have remained relatively unchanged since year-end ’11.