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COVID-19 Dings Life Insurers' Commercial Mortgage Returns

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Driven by growing COVID-19 related credit concerns, commercial mortgage investments held by life insurance companies posted a -1 % negative return for the first quarter, according to a Trepp LifeComps report released this week.

The total returns on those commercial investments is down significantly from a 0.55 % return on commercial loan investment portfolios for the fourth quarter of 2019, according to Trepp, a leading provider of information analytics and technology for structured finance, commercial real estate, and banking markets.

The total value of approximately 7,600 active commercial real estate loans held by life insurance companies dropped by $3 billion in just three months from $154.5 billion, to $151.5 billion, Trepp reported.

The decrease is small relative to life insurers’ total asset base: U.S. life insurers control about $7 trillion in assets.

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Trepp said the negative price appreciation was “primarily being driven by credit risk.”

The loans are tracked in Trepp’s Commercial Loan Index — a benchmark for the private commercial mortgage market based on mortgage loan cash flow and performance data. The data is collected quarterly from participating life insurers.

The average quarterly return for loans in the LifeComps index since 2000 has been 1.6%, according to Russell Hughes, head of data consortia initiatives at Trepp.

Hughes said the two key components that drive the market value of the loans are interest rates and credit quality. “Because the loans in the portfolio are primarily fixed rate, the value of the loans tend to move inversely to interest rates – decreasing interest rates increase the value of the loans,” he said.

“For the most recent quarter, interest rates plummeted which in the absence of anything else, would normally have significantly increased the market value of the loans and thereby increased the total return,” Hughes said. “However, the interest rate plunge was caused by the rapid deterioration of economic conditions which significantly increased the concerns for future credit performance (even though no loans had missed payments).”

“Despite the significant drop in treasury yields, credit concerns materially pushed down the value of the loan portfolios,” Hughes said. “While credit performance remains strong with no loans in the LifeComps Index being delinquent as of March 31, 2020, expectations about future credit performance are reflected in the specific reserve levels for these portfolios.”

The reserve levels for the portfolios are up more than 300% from what they were at the end of 2019, Hughes said.

“While these loans are among the highest in credit quality across the [commercial real estate] industry, they are not immune to the disruptions that the economy is currently experiencing,” Hughes said.

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