COVID-19 Dings Life Insurers' Commercial Mortgage Returns

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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