Fitch: U.S. Life Insurance - Mortgages in Demand

CHICAGO--()--The combination of attractive relative levels of fixed investment income and low credit losses are driving increased mortgage originations for many U.S. life insurers, according to Fitch Ratings. The increased mortgage activity reflects a broader industry trend associated with insurers increasingly turning to less liquid asset classes in search of yield in the persistent low interest rate environment.

Fitch currently views mortgage loans as credit neutral in terms of asset quality for the majority of companies in Fitch's life insurance universe. Fitch generally believes the presence of a well underwritten portfolio of mortgages, diversified by property type and location, can add value to a life insurer's investment portfolio. Tradeoffs include lower liquidity and credit losses in a period of economic stress.

Mortgage portfolio yields remained above 6% and realized capital losses for 2012 declined to $151 million versus $474 million for 2011 for Fitch's universe of life insurers. Problem mortgages and real estate acquired in the satisfaction of debt for 2012 remained manageable and was generally unchanged at 0.55% of mortgages. Life insurers' CMBS investment exposure improved in 2012 as impairments declined and CMBS investment declined to 4.4% of invested assets.

Many life insurers have increased investment in mortgages as a means of adding incremental yield in the prolonged period of low interest rates. New mortgage purchases increased strongly in 2012, led by mortgages on commercial properties. New mortgage investment increased 6% or $17.6 billion in 2012, versus 4%, or $12.6 billion in 2011, led primarily by the larger insurance companies. Net mortgage investment increased only 4% as many life insurers could not satisfy their appetite due to increasing competition for loans driven by income-oriented investors and the regular pay down of their existing book.

Fitch's base case scenario for 2013 expects realized losses on life insurers' commercial mortgages to be limited, assuming a weak economic recovery and continued high unemployment. A double dip in the economy could increase investment-related impairments in the investment portfolios, especially in mortgages and structured securities, but remain manageable.

In Fitch's overall U.S. CMBS portfolio, Fitch expects mostly stable ratings in 2013 with 82% having Stable Outlooks (balance weighted), most of which are rated 'AAAsf'. Property market fundamentals continue to stabilize as they have built on the positive trends observed the last three years.

The report 'U.S. Life Insurers Mortgage Loans Providing Yield' is available at www.fitchratings.com under 'Insurance' and 'Special Reports'.

Additional information is available at www.fitchratings.com.

Applicable Criteria and Related Research: U.S. Life Insurers - Mortgage Loans Providing Yield
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=713201

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Contacts

Fitch Ratings
Andrew Davidson, CFA, +1-312-368-3144
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Douglas Meyer, CFA, +1-312-368-2061
Managing Director
or
Robert Vrchota, +1-312-368-3336
Managing Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

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Contacts

Fitch Ratings
Andrew Davidson, CFA, +1-312-368-3144
Senior Director
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Douglas Meyer, CFA, +1-312-368-2061
Managing Director
or
Robert Vrchota, +1-312-368-3336
Managing Director
or
Media Relations:
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com