CRE's Losses Won't Threaten Life Insurance Ratings - Unless Values Fall More than Expected

by: Research Recap

Moody’s expects US insurers’ commercial mortgage losses to grow, but not to result in many rating downgrades unless commercial property values fall much further than expected.

Given that commercial real estate performance typically lags the general economy, we expect loss rates on both commercial mortgage loans (CMLs) and commercial mortgage-backed securities (NYSEARCA:CMBS) held in the investment portfolios of U.S. life insurers to increase and exceed the long-term historical average in the sector over the next three years. But the high-quality of life insurers’ CMLs and CMBS investments will reduce losses in comparison to banks and the general market.

Our expected case losses of $9-$11 billion for insurers over the next 2-3 years will dampen earnings, but not result in many rating downgrades. - Moody’s

However, the losses from a stress case scenario (which would be a highly-remote and unprecedented event) of $40-$45 billion would have a capital impact and would result in many downgrades–some being multi-notch.

Moody’s has increased the average lifetime expected and stress case loss factors for CMLs to approximately 3% (~$8 billion for industry) and 10% (~$27 billion), respectively, from approximately 2% and 5%, respectively. It also increased the average lifetime expected and stress case loss factors for CMBS to 1% (~$2 billion for industry) and 8% (~$16 billion), respectively, from 0.7% and 1.4%, respectively.


For details see U.S. Life Insurers’ Commercial Mortgage Exposure & Losses Are Manageable (Premium)