Life Insurers Manage CRE Loss

Chicago-Life insurers should be able to manage their exposure to losses on their commercial real estate-related investments in the near and intermediate timeframes, a report from Fitch Ratings here predicts.

"Loss exposure for U.S. life insurers will be mitigated compared to other market participants due to their investment in higher credit quality assets, strong capital position and earnings," said Andrew Davidson, senior director of Fitch's insurance ratings group. "Fitch's negative outlook for life insurers continues to be driven largely by concerns over investment losses due to deterioration in the financial markets and the economic downturn."

The report is titled "U.S. Life Insurers: Commercial Mortgages the Next Shoe to Drop?"

The rating agency added that life companies also practiced relative conservative underwriting compared with some other commercial real estate market investors. Fitch said it projects the potential for CRE-related investment losses to be incurred through 2011 could be in the range of $18.5 billion to $22.6 billion compared with life insurance industry capital of $228 billion as of the middle of this year.

However, significant declines in statutory capital over the last 18 months have weakened insurers' ability to manage through a prolonged economic downturn.

Life insurance company investments in directly placed mortgages and highly rated seasoned commercial mortgage-backed securities continued to perform well through midyear 2009 in historical terms. But the report predicts insurers will suffer from increased credit impairments on CMBS investments in the latter half of this year and on mortgage investments between 2010 and 2012.

"Fitch projects the potential for loss is in the range of $13.1 billion to $16 billion for CMBS owned by life insurance companies and $5.4 billion to $6.6 billion for directly placed mortgages under its core stress through 2011. These stress losses are largely considered in current life insurance company ratings. Higher-than-expected losses under a more severe stress scenario could result in further downgrades. Fitch would expect that a more drawn out economic recovery will lead to an increase in commercial mortgage underperformance exceeding the average level during the last 10 years, though not as high as experienced in the early 1990s," the report said.

It estimates life company exposure to directly placed mortgage loans at yearend 2008 was $308 billion, or 12% of total invested assets, and CMBS and CRE collateralized debt obligation exposure exceeded $150 billion, or 5.8% of total invested assets.

"Despite the better quality of directly placed mortgage loans by life companies, the underlying properties will still be susceptible to the declines in commercial real estate fundamentals and property values over the next few years. Regulatory approaches may influence how losses and underwater values are ultimately handled," the report noted. Fitch said life insurers with favorable CRE risk profiles have a low exposure to CMBS and CRE CDOs. Their CMBS portfolios where the majority of securities consist of loans originated in 2005 or earlier are rated AAA. Their directly placed mortgages are geographically diversified and they have low exposure to hotels and multifamily properties.

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