Life Cos. Step Up Commercial Mortgages

NEW YORK CITY—Although their exposure to CMBS has been essentially flat over the past year,  life insurers have stepped up their involvement in commercial mortgage origination. Fitch Ratings reported last week that the search for yield led to a record $77 billion of new mortgage originations in 2013, an amount that's expected to increase in calendar 2014.

More life companies have increased their allocation to commercial mortgage loans as an alternative to lower-yielding bonds, says Fitch. These include large mutual companies whose general account mortgage allocations are in the 12% to 15% range. In its annual survey of Fitch-rated life insurance entities, the ratings agency found that life companies generally have increased their commercial mortgage allocations from an average of 11% in 2011 to 11.5% last year, with most ranging from 8% to 12% of general account investment.

For life companies, net mortgages increased only 4.4%, or $13.8 billion, due in part to greater runoff of existing mortgages. Mortgage portfolio yields declined to 5.75% in '13 from 6.06% for 2012, but these yields continue to be attractive  when they're compared to those of BBB-rated bonds.

Mortgage performance for Fitch-rated insurers was strong once more last year as nonperforming loans and delinquencies remained very low and real estate acquired in satisfaction of debt declined. Troubled mortgages 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.

Fitch says that many life companies likely would have put more money to work in the mortgage sector last year, but they were outbid by increasing demand from other insurance companies as well as increased competition from conduits as CMBS market continues its rebound. Fitch cites weakening underwriting standards for CMBS loans due to increased competition among mortgage originators, including increased lending from the life companies.

Among life companies, the overall quality of commercial loan portfolios remains solid, according to Fitch's annual survey. Ninety-six percent of commercial loans, including mortgages, had loan-to-values below 80% at year-end '13, up from 94% at year-end '12 and 91% at year-end '11. Debt service coverage ratios were also strong in '13, with only 4% of commercial mortgage loans having DSCRs below 1.0x.

For the 35 insurance groups Fitch surveyed, fixed-income securities on average accounted for 84% of total invested assets. The remaining 16% was made up of contract loans at 4%, cash at 2%, stock at 2%, derivatives at 1%, real estate at 1% and other invested assets, including those shown on Schedule BA of the statutory statements, at 6%.

With 63% of life companies' bond holdings represented by corporates, structured securities represented 24% of the bond portfolio among the companies surveyed by Fitch. This included agency pass-throughs, CMBS, non-agency RMBS and ABS. Exposure to agency RMBS, CMBS and non-agency RMBS was flat to down over the prior year, while allocation to ABS increased materially, mainly due to record issuance of collateralized loan obligations.