Insurance Cos.' Mortgage Investments Deliver Solid Performance in 2014

WASHINGTON, DC—Insurance companies that invest in commercial mortgages experienced strong results for the first six months in 2014, with total realized net losses of 0.04%, according to a semi-annual survey by the Commercial Real Estate Finance Council (CREFC) and Trepp.

CREFC began surveying insurance companies about the performance of their CRE investments a few years ago as part of the association's push to expand beyond its conduit roots. The insurance companies came on board when they realized that the survey would yield valuable information that would otherwise be impossible to secure in the agreement, CREFC CEO Steve Renna told Real Estate Forum in a previous interview.

Indeed, "the CREFC/Trepp survey is invaluable as there is no other source that provides this level of detail and assessment," said Mike Moran, managing director – Real Estate Investments, Allstate Investments and the current chair of CREFC's Portfolio Lenders Insurance Company Sub-Forum.

The survey results are also beneficial for the CRE capital markets for the same reason – and because the additional data will likely lead to more investment.

"These results show another superior year for insurance company lenders which will equate to more dollars being allocated to whole loans for 2015," Moran said.

The total realized net losses as of mid-year 2014, for example, dropped six basis points when compared to the losses reported in 2013, which were at 0.10%. Compared to CMBS and commercial banks, which experienced losses of 0.09% and 0.84% respectively, the insurance companies had lower losses and continue to outperform the other two markets, the survey concluded.

The survey also uncovered slight upticks in loan delinquencies and problem loans.

Total loan delinquencies of 30 days or greater averaged 0.15% during the first half of 2014, up 0.06% from year-end 2013. Problem loans, compared to year-end 2013, increased by 4 basis points to 0.10% as of mid-year 2014. Here too, delinquency rates for insurance firms stayed well below CMBS (5.86%) and commercial banks (1.80%).

Insurance companies are using a number of strategies to deal with their troubled assets, including foreclosures, note sales, discounted pay-offs and other actions, according to the survey.

For the realized losses that were recorded, 65.8% were generated from write-downs, and 30.6% from discounted payoffs. Distressed note sales, foreclosures and non-distressed sales accounted for the remaining 3.6% of total realized losses. Realized losses arising from write-downs almost doubled while realized losses from distressed note sales decreased about 22.6% compared to losses recorded as of year-end 2013.

The survey also noted that insurance companies' average reported portfolio loan-to-values and debt service coverage ratios have improving over the past several years.

The average commercial mortgage loan-to-value was 55.1% at the end of the first half of 2014. 1.19% of loan exposure for all companies was above a 100% loan-to-value. The average debt service coverage ratio (DSCR) for the portfolios was 2.0x. Also, about 95% of all exposure held was above a 1.0x debt service coverage ratio. Compared to year-end 2013, the average portfolio LTV was down 1.3% and DSCR was up 4 basis points.

New originations rose during the survey period, with participants adding roughly $14.5 billion of new mortgages during the first half of 2014, 90% of which were fixed-rate loans. Roughly the same percentage of the new originations came from "New Business/Financing," which could include refinancing of maturing loans from elsewhere. Only 13% of these new originations resulted from "Refinancing" existing mortgages.