Returns on private commercial mortgages held by life insurance companies rebounded into positive territory in first quarter 2009 after two consecutive quarters of negative returns, according to the LifeComps Commercial Mortgage Index. First quarter‘s positive return of 1.63% followed returns of -3.16% in fourth quarter and -2.08 % in third quarter 2008. ‘s in May issued a report entitled, For U.S. Life Insurers, The Pain From Real Estate Could Lie Ahead, which laid out the warning that when real estate markets sour, the possibility exists that commercial mortgages will default and perhaps take a toll on life insurance ratings. So far, Standard & Poor‘s Ratings Services said it believes that this has not happened.‘ history with negative annual total returns. Income return for first quarter was 6.57% and price return was -9.94%.
Of total return in the first quarter, 1.69% was income return and -0.05% was price return. The price loss was driven by higher treasury yields which slightly outweighed the positive effect from improved valuations.
It is not certain the positive returns will hold, however, Standard & Poor
“Currently, the foreclosure rate of commercial mortgages in life insurance portfolios is virtually zero,” S&P reported. “But we believe that this will not necessarily be the case over the course of this economic cycle. Commercial real estate performance is generally a lagging economic indicator. Owners tend to cut all other expenses before defaulting on their mortgages or letting property go into foreclosure. Therefore, as the recession rolls on, we believe that there is an increasing possibility of distress for commercial real estate owners and for those that hold their mortgages.”
S&P said that before before insurers see any ratings impacts, it would “typically have to see net losses from foreclosures of 5% or more.”
According to the LifeComps Commercial Mortgage Index, for the 12 months ended March 31, total return remained negative with a -3.37% total return compared to -4.14% last quarter. These are the only two quarters in LifeComps
Apartments produced the highest return in first quarter with a 3.49% total return followed by retail at 1.25%, office at 1.23% and industrial at 0.85%. Over 12 months, retail fared the best with a total return of -2.94% compared to -3.10% for office, -3.25% for apartments and -3.51% for industrial.
The LifeComps Commercial Mortgage Index is the only published benchmark for the private commercial mortgage market based on actual cash flow data, which has been collected quarterly from participating life insurance companies since 1996. Active loans in the LifeComps Index number 6,500 with an aggregate principal balance of approximately $85 billion and market value of $77.4 billion. The weighted average duration is 4 years, and average loan-to-value is 66.5%.
Overall, life insurance companies hold $310 billion industry wide in commercial and multifamily mortgages.
Participating life insurers include Allstate Life Insurance, CIGNA Investment Management, The Equitable, John Hancock, Nationwide, Northwestern Mutual, Principal Financial and Prudential Insurance Company of America.
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