Mortgages owned by life insurance companies have seen a significant increase of 77% since 2019, according to a report from AM Best. This growth is primarily driven by residential mortgages, although distressed loans only make up a small portion of the total portfolio.
The total portfolio of mortgages owned by life insurance companies currently stands at $691.2 billion, with distressed loans accounting for just $4.5 billion. Last year, these companies had a portfolio of $639.8 billion, which is a substantial increase from the $363.3 billion portfolio in 2013.
The low interest rate environment over the past decade has prompted life companies to increase their exposure to mortgages, as commercial real estate offered better returns compared to investment grade bonds. As of 2022, mortgages make up 13.5% of their invested assets, up from 10% in 2013.
David Lopes, a senior industry research analyst, stated that shifting allocations to mortgage loans helped mitigate the spread tightening between liabilities and assets.
However, the rapid rise in mortgage rates since last spring has made borrowing more expensive, impacting the performance of these mortgages. Loans secured by office properties have also seen a decline, as the work-from-home trend resulting from the pandemic has affected the demand for office spaces.
Jason Hopper, an associate director, noted that the share of office properties in mortgage portfolios has dropped to 11% in the last two years, less than half the level in 2018. The industry’s mortgage portfolio allocation to office properties has also reduced to 21% in 2022, from over 26% in 2018.
Despite the challenges, the report emphasized that the performance of insurers’ commercial mortgage loan holdings has historically been favorable due to disciplined underwriting and low loan-to-value ratios.
The total commercial portion of the mortgage portfolio has increased to $605.5 billion in 2022, up from $570.1 billion in the previous year.
While commercial and multifamily mortgage debt outstanding has grown for the three months ended June 30 across all investor types, life companies are investing more in multifamily properties. Multifamily properties now account for 32% of their mortgage holdings, surpassing office properties.
Retail, another troubled commercial property type, now represents 16.7% of life insurer portfolios, down from 22.1% in 2018.
Residential mortgages, although comprising only 8.5% of life company investments, make up 77% of the total problem mortgages. The dollar amount of residential mortgages increased from $44.1 billion in 2021 to $58.8 billion last year, with 97% of the exposure held by 20 companies.
This shift towards residential mortgages has occurred over the past decade, with this category accounting for just $5.8 billion or 1.6% of the mortgages owned by life companies in 2013.
Overall, the mortgage portfolio of life insurance companies has experienced significant changes due to various economic factors, including interest rate fluctuations, the impact of the pandemic on certain property types, and the search for better returns. The performance of these mortgages and their impact on the overall portfolio will continue to be closely monitored.