According to a new AM Best report, mortgage loan holdings for the US life insurance industry grew by 6.6% in 2021, to $639.8 billion, in line with the 10-year average, after depressed growth of 3.8% in 2020.
The report, titled, “Loan-to-Value Rises, Debt Service Coverage Weakens, for U.S. Life Insurers”, highlights that the COVID-19 pandemic shuttered businesses in 2020, which ultimately led to a decline in revenue at retail stores, the services sector and hotels, pressuring borrowers’ ability to pay their rent or mortgage loans.
However, with life returning to somewhat normal, the impacts of the pandemic still can be seen in the significant number of closed businesses, driving occupancy rates lower.
Currently, the market is navigating through inflationary pressures and rising interest rates, which despite driving up yield, could dampen demand.
AM Best noted that these factors will push risk management and underwriting discipline to the forefront for insurers, who must screen their revenue and growth assumptions, as well as the debt servicing capabilities of potential borrowers to match appropriate risk tolerance levels.
Moreover, valuation declines caused by the pandemic have led to higher loan-to-value (LTV) ratios of commercial mortgage loans, more than 10% of mortgages had LTVs higher than 70%, compared with 6.4% in 2019.
At the same time, the book value of problem mortgage loans increased massively during the pandemic, up 60% since 2019 to over $4 billion. Also, despite making up nearly 6.9% of all mortgages owned by life insurers, residential mortgage loans account for over 64% of all problem mortgages.
Lastly, residential mortgage holdings grew by nearly 40% in 2021, with these loans now accounting for almost 7% of the industry’s mortgage loan portfolio, up from just 1.3% in 2012.
