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Life Insurers’ Property Loans to Set Record for Worst Returns

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Life insurers may be a little tired of real estate.

According to Trepp, a data provider that tracks securitized mortgages, they’re making the worst returns on real estate mortgages in 20 years.

Trepp’s life insurance earnings index is down 11.8% year-to-date. This will be the worst year for life insurers since Trepp started collecting data in his 2008. cryptic crashbut insurers rely on such investments to provide steady, if not spectacular, returns.

The index is interesting because life insurance companies account for 12% of all commercial real estate loans, according to Trepp. The withdrawal of life insurers could have a significant impact on financing of major real estate projects.

But while life insurance returns are declining, it’s not Armageddon. The property backing the loan does not yet have widespread financial difficulties or cash flow problems.

“We’ve never had a major credit problem,” Trepp managing director Matt Anderson said.

The bigger problem is that higher interest rates low rating across bonds. Both government and corporate bonds have been stinking lately. Life insurance is no exception.

Rising interest rates are driving down valuations of real estate backing loans held by life insurers as future cash flows are discounted, Trep said.

But Anderson noted that life insurers have yet to officially record those negative returns. The insurance company plans to hold the loan on its books rather than write it off immediately. So negative returns look scary, but don’t worry just yet.

“Their intention is to hold it for the duration of the loan,” Anderson said.

However, it is another matter if the property backing the loan is: pain.

If foreclosures spike or properties fail to generate sufficient cash flow, life insurers will be hit with a one-two punch as they are already battling rising interest rates. Not only could this lead to even lower returns for life insurance investors, but it could also force life insurers to cut back on lending.

So far, life insurers have continued to make new loans. Life insurers’ commercial mortgage portfolios grew at an annualized rate of 9.1% in the second quarter, according to Trepp.

“Life insurers are seeing good capital inflows into mortgages,” Trep said. “Rental demand remains strong.”

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