Life insurers pull back from commercial mortgage purchases by over 60%

As analysts scrutinize commercial real estate's potential to destabilize the banking industry, the sector also faces a slowdown in loan purchases from one of its largest investors — life insurers.

Mortgage loans acquired by the life insurance industry plunged 59.9% to $14.86 billion in the first quarter compared to the same period a year earlier, according to new research published by S&P Global Market Intelligence. The amount was the smallest first-quarter number since 2014, while also dropping to its lowest mark since the COVID-impacted months of mid 2020.

Uninsured commercial mortgages, which typically make up the majority of loans acquired by life insurance companies, saw an even steeper falloff of 63.8% to $9.34 billion from $25.77 billion in the first quarter of 2022. The total share of commercial loans relative to overall quarterly acquisitions came out to 64.8% in dollar volume.

Meanwhile, uninsured residential securities saw their share grow to 29.1% of insurer purchases, marking noticeable diversification since 2020. The split that year between commercial and residential acquisitions was 77.2% to 11%.

"The changing landscape of general account asset managers may be as responsible for that trend as a desire to diversify," according to Tim Zawacki, principal research analyst at S&P Global Market Intelligence.

The latest data comes as commercial real estate loans show hints of deterioration in recent performance, as federal officials also weigh in about the risk they may hold. Delinquencies in the first three months this year came in higher from the fourth quarter across all investor types, according to the Mortgage Bankers Association. Commercial loans held by life insurance companies 60 days or more past due had a delinquency rate of 0.21% up on both a quarterly and annual basis. But while elevated, they were still well below historic lows.

The office loan market, in particular, is the source of much of the current anxiety, largely fueled by growing numbers of vacancies resulting from resistance toward a return to in-person work. Delinquent office loans hit a five-year high in May, with more than 4% of loans packaged within securities more than 30 days past due, real estate data provider Trepp recently said. 

Compared to a year earlier, life insurers have also significantly cut back on their acquisitions of office-property loans, with just $693.53 million worth purchased in the first quarter, representing an 81% annual decrease, S&P Global's analysis found. The total added up to just a 7.4% share of all mortgages the industry acquired, well off 14.2% a year earlier and 33.5% in the first quarter of 2018.

Making up for some of that dropoff were investments in multifamily and industrial properties, which include distribution centers, data hubs and manufacturing plants. But the industry's acquisitions in those assets also took a steep dive as well, with multifamily purchase volume falling on an annual basis by 65.8%, and industrial down 58%.

MetLife held the largest mortgage portfolio volume of all insurers with $60.24 billion at the end of the first quarter, well outpacing Northwestern Mutual and New York Life at $51.92 billion and $38.66 billion, respectively. None of the top 10 mortgage holders increased their acquisition numbers on a year-over-year basis, S&P Global said. 

Still, while headwinds appear, insurers insist that the credit quality in their mortgage portfolios is strong, as many expressed confidence in recent earnings calls about how they would perform in a downturn thanks to underwriting standards and previous stress-test analysis.

"Life insurers are traditionally viewed as conservative lenders, focusing on commercial mortgages with relatively low loan-to-value ratios and high debt-service coverage ratios," Zawacki said.

While first-quarter numbers showed some initial signs of stress from changes in mortgage-loan valuation, problems were limited to a few companies. Unrealized valuation decreases of $120.2 million were the highest in absolute terms in at least 15 years, but only two insurers were responsible for most of the loss.

Insurers will feel the effects of current commercial mortgage troubles, but more serious impact may turn out to be isolated, rather than becoming a wider industry crisis, S&P determined.