Commercial real estate (CRE) poses a significant exposure for US life insurers, who hold over $900 bn in CRE, representing about 17% of their total invested assets, according to a Moody’s report.
This exposure is mainly in commercial mortgage loans (CMLs) and commercial mortgage-backed securities (CMBS). However, weak spots have surfaced in recent years, especially within the office segment.
Rising refinancing costs, particularly in the office sector, have decreased property valuations. This decline has weakened loan-to-value (LTV) metrics and increased insurers’ capital charges.
US life insurers hold more than $600 bn in mortgage loans. In recent years, they have reduced their exposure to the office segment due to the impact of work-from-home trends on occupancy and significant drops in property valuations, making refinancing more challenging.
In 2023, weakness in commercial real estate, especially in the office subsector, led insurers to reassess their exposures.
From July 2022 to Q1 2024, multifamily properties saw an 18% decline in value due to rising rates, while office properties experienced a 24% peak decline.
Moody’s also notes that mortgage loan quality continues to deteriorate, lowering valuations, increasing LTV ratios, and leading to higher loan delinquencies.
The agency expects than U.S. & European life insurers’ CRE exposure, and insurers to collaborate with borrowers to address maturities in the next 12-18 months, leveraging stable immediate liquidity needs to their advantage.
US life insurers’ CMBS holdings are mainly high-quality conduit deals, aligning well with insurers’ long-term liabilities.
However, about one-third of mortgage loan investments are in large loan or single asset/single borrower mortgages (LL/SASB), which typically have higher credit enhancements due to property and borrower concentration.
Exposure to other commercial real estate investments remains minimal. US life insurers have limited holdings in REITs, with even smaller exposure to office-related REITs.
The prolonged high-interest-rate environment has increased funding costs, leading to less liquid real estate markets and lower property valuations.
Moody’s added that although a decline in interest rates this year could boost transaction activity, asset values might decline further if a weakening economy reduces real estate demand.
A slowing economy will pressure NOI growth over the next 12-18 months, while operating expenses, including insurance, payroll, and materials costs, will stay high, affecting margins as demand slows.
