Life Insurers: Commercial Real Estate Exposure

What a difference a year (and a half) can make. In April 2008, ratings agency Fitch published a report indicating that while the outlook for commercial real estate (CRE) related investments had deteriorated, it did not anticipate a major impact on U.S. life insurers’ capital or ratings in 2008. Now, Fitch has published a revised report projecting that U.S. life insurers may incur CRE-related investment losses in the range of $18.5 billion to $22.6 billion through 2011. Why the reversal  of fortunes? Fitch reports that commercial real estate fundamentals are softening as rents are declining and vacancies increasing in response to the broader economic downturn. It expects all commercial property types to experience declines in income and value in this stressed environment. On a positive note, Fitch believes the industry’s loss exposure to CRE-related assets is manageable in the context of the industry’s strong capital position and earnings (industry capital of $228 billion at June 30, 2009 and statutory net operating earnings of $22.4 billion in the first half of 2009), but it warns that CRE-related losses are additive to the industry total investment loss exposure and will be a source of incremental pressure on industry ratings. To date, life insurers have not recognized material impairments or losses on CRE-related investments. While the financial crisis has led to a significant increase in investment losses and a material capital decline for U.S. life insurers, until now this has been driven primarily by their exposure to corporate bonds, residential mortgage-backed securities, asset-backed securities and equities. According to Fitch, this trend is about to change. For more on this story, check out a November 17 Bloomberg article by Jamie McGee. Check out I.I.I. facts and stats on life insurer investments.

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