Driven by a Decline in Loan Values, Life Companies See Returns Drop in Q1: Trepp

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“Commercial mortgage investments held by life insurance companies posted a negative total return of -0.8 percent in the first quarter of 2021, a 1.65 percent decrease from the positive 1.22 percent return realized in the fourth quarter of 2020,” wrote Jennifer Dimaano, a data analyst at Trepp.The negative total return is attributable to a decline in reported loan values of -1.77 percent. Income returns continue to be positive and contributed 0.97 percent in the first quarter of the year.

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“Treasury yields have significantly increased this past quarter, which contributed to the decline in loan values. The yield on the 10-year Treasury rose to 174 basis points, a new high since the prior peak of 192 basis points in the fourth quarter of 2019. There is a growing market concern for higher inflation in the near future. The same growing concerns could also increase borrower demand for life insurance company loans as borrowers look to take advantage of lower interest rates.

“Credit concerns remain evident among lenders, but some measures of credit stress have come down from previous quarters: the overall delinquency rate is unchanged from the fourth quarter of 2020, at 0.04 percent; and lender deferrals and forbearance are down 12 percent quarter over quarter, with only $21 million in interest capitalized in the fourth quarter of 2021.

“Cumulative charge-offs on existing loans decreased by a net of $15 million from the fourth quarter of 2020 to the first quarter of 2021, primarily from a reversal of prior office property charge-offs. The quarter-over-quarter change in specific reserves decreased by a net of $17.7 million, resulting in a $131 million specific reserve balance.

“On a rolling four-quarter basis (the second quarter of 2020 through the first quarter of 2021), income contributed 4.1 percent, while appreciation added 2.71 percent for a total return of 6.81 percent.

“Of the four major property types, industrial properties performed best over 12 months with a total return of 8.1 percent, followed by multifamily at 7.81 percent, office at 7.04 percent, and retail at 4.14 percent. There are approximately 8,000 active loans in the LifeComps (life insurance companies) Index, with an aggregate principal balance of $152 billion. The weighted average duration is 5.19 years.”