Insurers continue to find opportunities in real estate, although emphasis is being placed on fundamentals given the vagaries of current market conditions.
Today, an investment official in an insurance company needs to be more keenly aware of the value of a property and the income and expenses it will generate, says David Stewart, managing director with Prudential Insurance Company of America in Newark, N.J.
The good news, according to Stewart, is that today’s investors own properties for cash flows as opposed to the tax benefits. “It gives more confidence that the properties are maintained and leased properly.”
Insurers are also picking property types that are less risky, such as apartment complexes and industrial developments, he says.
As of Dec. 31, 2000, Pru held approximately 12% of its general account portfolio in mortgage loans. Of that total, 1,200 were commercial mortgage loans with a carrying value of $13.6 billion and $2 billion were residential and agricultural loans.
Industrywide, mortgage loans on office buildings, shopping centers, manufacturing plants and warehouses increased to $211 billion at year-end 1999, up from $199 billion at year-end 1998, according to the American Council of Life Insurers’ 2000 Fact Book.
Mortgage holdings for residential properties stood at $6 billion at year-end 1999, it states.
Commercial mortgages represented 92% of mortgages held by life insurers in 1999, according to the ACLI. One- to four-family dwellings represented 2% of the insurers’ mortgage distribution, with the remaining 6% comprised of farm mortgages, according to the ACLI.
Stewart says Prudential conducts its business through a network of advisors, mainly its own staff, although for smaller transactions, it does use a brokerage network. Pru Express handles transactions of up to $20 million, according to Prudential spokesperson Theresa Miller.
But many companies, according to Stewart, cannot afford a staff to work on such transactions.
For such companies, there are Web sites that offer online service for commercial real estate.
One such company is Precept of Oakland, Calif.
The company’s Web site, www.preceptmortgage.com, offers loan analyses, real-time auction of loan requests and assistance with the post-auction legal closing process.
Frank Scavone, CEO, says life insurance companies are moving in the direction of capital market transactions with regard to underwriting, becoming much more focused on cash flows.
Scavone says that by using an online process, an insurer can cut anywhere from 30-60 days of work and save approximately 40 basis points or 0.4% on the cost of a real estate transaction.
Work is streamlined, he says because an investment manager can conduct due diligence and examine the property online.
A lender can take part in a blind auction. Once a submit button is clicked, the system automatically double-checks with the lender that the submission was not a mistake. If the lender did want to submit the bid, then it is considered a “live commitment,” according to Scavone, who says that paperwork follows in approximately three days.
For Precept’s services, 10 basis points or 0.1% is usually taken from the borrower and 40 basis points or 0.4% from the lender, says Scavone.
Reproduced from National Underwriter Life & Health/Financial Services Edition, July 20, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.