U.S. L/A insurers increased allocations to commercial mortgage loan portfolios in 2023, AM Best

A new report from global ratings agency AM Best shows that U.S. life/annuity  (L/A) insurers continued to increase allocations to commercial mortgage loan portfolios in 2023, however, problem loans, which includes those 90 days delinquent, rose sharply.

Best’s report explains that life/annuity insurers expanded their allocations to mortgage loans last year by more than 6% to $734.2 billion, with mortgages now accounting for 13.5% of the segment’s investment portfolios.

According to the agency, new acquisitions were largely triggered by multi-unit (28%), residential (26%), and industrial property loans (18%), accounting for over 70% of new acquisitions in 2023.

Jason Hopper, associate director, AM Best, commented: “Although yields rose in 2023, so did the number of problem loans, which have been climbing steadily since 2020, and were up by nearly 44% in 2023. The total amount of mortgages 90 days delinquent doubled, while those in the process of foreclosure were 63% higher than in 2022.”

The number of restructured loans has also been elevated in the last two years. Best added, that problem loans account for less than 1% of insurers’ mortgage loan portfolios and less than 1.5% of capital & surplus for the industry as a whole.

Moreover, Best’s report also revealed that office properties account for more than a quarter of overdue loans and those in foreclosure and almost half of those that have been restructured but constitute just 17% of total mortgage portfolios.

It’s important to note, that office loans have recently been facing headwinds, mostly due to the impact of the COVID-19 pandemic and more people working remotely either full time or within a hybrid role.

Furthermore, Best also explains that the quality of mortgages in good standing continued to deteriorate in 2023, as economic conditions impacted debt service coverage and loan-to-value ratios (LTV).

“This had resulted in a fallen angels scenario that happens when loans migrate down the credit scale. This trend is likely to continue until the market becomes more stable as a result of interest rates and loan maturity,” Hopper added.

Best explained how organisations sought to improve portfolio LTV throughout the pandemic, by seeking higher quality and better LTV on new issuances. However, rising interest rates lowered valuations, notably within the office sector, which ultimately has dragged credit quality down.