Fitch Ratings expects life insurers to see 50% more losses on mortgage loans than what they saw during the 2007-2009 Great Recession.
Fitch says these elevated losses reflect both the severity of the pandemic fallout and the slow pace of the expected recovery. It expects these losses to start emerging when insurers file their statutory statements for the third quarter with state insurance regulators.
“Loss expectations are vulnerable to revisions given the high degree of uncertainty associated with the pandemic’s longer-term economic fallout,” Fitch said in a release.
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Under its base-case loss assumptions, Fitch anticipates commercial mortgage loan losses to amount to 180 basis points. Since loss recognition on commercial mortgage loans typically is behind other asset classes, there may be a lag before the full extent of those problems are known. The timing of losses is also subject to regulatory forbearance actions, which may extend into next year.
Exposure to losses on investments, including commercial mortgage loans, is a crucial rating sensitivity and driver of the negative outlook on the US life insurance sector, Fitch says. While the credit metrics of life insurers’ performing commercial mortgages are high, the credit quality of commercial mortgages declined for the second consecutive year, denoting a weakening trend, according to the rating agency.