Loan losses for life insurers to exceed 2007-2008: Fitch

Despite a moderate level of forbearance on their commercial mortgages, U.S. life insurers are still bracing for 50% higher deficits than during the global financial crisis, according to a new report from Fitch Rating.

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The 17-page U.S. Life Insurer Commercial Mortgage Update said loan losses could rise to 180 basis points, up 50 percent from GFC levels. The schedule of losses on commercial mortgages, which tends to lag on asset classes like stocks and bonds, could extend into next year due to regulatory forbearance.

The report notes that, on average, U.S. life insurers have provided relief on 9% of commercial mortgage loans by outstanding balance, with retail and hotel borrowers accounting for 52% and 26% of all mortgages, respectively. held by life insurers with approved relief. measures.

Although hotel loans have been hit the hardest by the pandemic, personal loans account for a much larger share – 19% – of total commercial mortgages held by US life insurance companies, compared to 4% for loans. hoteliers. In the second quarter, multi-family borrowers made up the largest portion of life insurers’ commercial mortgage portfolios at 31%, followed by offices at 27% and retail at 19%. Industrial loans represented 13% of loan portfolios; other, 5 percent; hotels / motels, 4 percent; and mixed use, 1 percent.

Relief for borrowers

The most common form of relief provided by life insurers to commercial mortgage borrowers is a temporary period of debt service repayment, including a forfeiture of principal and short-term interest and a reduction in mortgage amortization. capital. Other common forms of relief were temporary changes in loan terms to waive covenants, carryovers from capital reserves, and the use of furniture, fixture and equipment reserves to pay for the service. debt and loan term extensions, usually one year.

Fitch said he expects the losses to start showing up in statutory returns from life insurance companies in the third quarter. In the second quarter, life insurance companies held $ 574 billion, or 15%, in commercial and multi-family mortgages, ranking third behind banks and government-funded businesses, according to the Mortgage Bankers Association. Fitch noted that starting in the second quarter, the majority of life insurers gave relief to borrowers for three to six months, with a lower percentage of lenders offering relief for six to 12 months.

Despite the impact of the pandemic on commercial mortgages of life insurance companies and uncertainty over the long-term economic impact, Fitch determines that “commercial mortgages are a basic asset class for American life insurers “, Nelson Ma, Director, Fitch Ratings, Recounted Commercial Real Estate Manager.

“While we expect underwriting standards to be stricter and move away from the types of property that are directly affected by the pandemic in the future, we expect life insurers to remain an active participant in the market. commercial mortgage market, ”said Ma.

Read the full report from Fitch Ratings.