Life Insurers' Commercial Mortgages Struggled in 2022
The firm says overall performance was the worst since at least 1996.
Rising interest rates hit life insurers’ commercial mortgage investments hard in 2022, according to mortgage database company Trepp.
The firm’s LifeComps Total Return Index, a performance measure for life insurers’ commercial mortgage investments, fell to 449.154 in the fourth quarter of 2022, from 499.84 a year earlier.
The value of life insurers’ commercial mortgages fell 14.3%.
Researchers have been compiling the LifeComps index since 1997. The 2022 performance is the worst the LifeComps team has ever reported, Trepp said.
What It Means
Life insurers note that most of their products are designed to stay in place for many years, and that they intend to hold most of their mortgages and mortgage-backed securities to maturity. But poor mortgage portfolio performance could hurt life insurers that have sudden increases in cash needs.
Life Insurers’ Portfolios
Because of regulatory requirements, U.S. life insurers tend to invest heavily in bonds, mortgage-backed securities and other long-term, fixed-income assets.
U.S. life insurers ended 2021 with $640 billion invested in mortgages and $204 billion in commercial mortgage-backed securities, according to the National Association of Insurance Commissioners Capital Markets Bureau.
Rising interest rates increase what life insurers can earn on new fixed-income investments.
Rising rates hurt the “fair market value,” or current resale value, of the fixed-income assets already on insurers’ books, because buyers want the yields on the cash they invest in secondhand assets to match the yields on cash they invest in newly created assets.
The effect of rate spikes on fair market value depends on how long assets are designed to last.
The 2022 spike could have caused the fair market value of a typical mortgage-backed security with a duration of less than two years to fall 3% between the end of 2021 and the end of 2022, and the value of a mortgage-backed security with a duration of 20 years or more to fall about 40%, according to Risk & Regulatory Consulting.
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