Life insurers are expected to see higher losses on commercial mortgage loans compared to levels seen during the Global Financial Crisis (GFC), reflecting both the severity of the pandemic fallout and the slow pace of the expected recovery, according to Fitch Ratings.
Analysts expect elevated losses from the coronavirus pandemic to begin to emerge at the earliest in the third quarter statutory statements.
Under Fitch’s base case loss assumptions, commercial mortgage loan losses are anticipated to amount to 180 bps, a 50% increase from levels seen during the GFC.
Loss recognition on commercial mortgage loans typically lags other asset classes, including equities and bonds.
Exposure to losses on investments, including commercial mortgage loans, is a key rating sensitivity and driver of the negative outlook on the US life insurance sector.
Analysts say the credit metrics of life insurers’ performing commercial mortgages are high when reviewing results that the NAIC mortgage designations measure.
However, the credit quality of commercial mortgages declined for the second consecutive year, denoting a weakening trend.
On average, US life insurers granted relief measures on 9% of commercial real estate mortgages by outstanding balance.
Retail and hotel borrowers accounted for 52% and 26%, respectively, of all mortgage loans held by life insurers with approved relief measures.
While hotel loans were more affected by the pandemic, retail loans account for a much larger share of total commercial mortgages held by US life insurers at 19% compared with hotel loans at 4% of total commercial mortgages.
