Life and Annuity Issuers Face More Mortgage Pain: Analyst

The U.S. commercial real estate slump is causing more problems for life and annuity issuers’ investment portfolios, according to a new S&P Global Ratings market review.

Carmi Margalit, S&P Global’s life insurance sector lead, reported that 1.97% of the commercial mortgages in the portfolios have been extended for up to four years. The share of life insurers’ commercial mortgages extended is up from 1.06% in 2022 and up from just 0.43% in 2019.

The share of commercial mortgages in the portfolios that have been restructured increased to 0.21%, from 0.15% in 2022 and 0.11% in 2019.

Overall, when compared with what’s happening to banks’ commercial mortgage loans, “life insurers’ commercial mortgages are holding up well,” Margalit said.

But the Site Selection Group, a commercial real estate advisory firm, estimates that office building prices are already down about 15% to 20%. S&P Global analysts have estimated that a 20% office building price drop would have little or no impact on statutory surplus at the typical life insurer, but a 6.6% hit to statutory surplus at one insurer.

If office building prices fell 40%, that could cause a hit equal to 0.3% of statutory surplus at the typical life insurer but a 14% hit at one.

None of the insurers at risk were named.

What it means: Like individual clients, life insurers try to create diversified investment portfolios, and conditions that help some assets will hurt others.

The same increase in interest rates that’s pinching life insurers’ commercial mortgage loan investments is increasing the yields they earn on new bonds, helping them lock in the returns they need to offer life insurance policies and annuities with attractive benefit guarantees.

But advisors need to look carefully to see whether unusual problems are emerging at the insurers providing their clients’ life and annuity products.