Insurers not betting the house on mortgage loans
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A downturn in the residential housing market captured the public's attention in 2007, but an analysis of SNL's statutory insurance data suggests that the outlook for commercial real estate is of much greater importance to those insurance companies that invest in mortgage loans.
Concerns about declines in real estate valuations did not cause insurance companies, by and large, to engage in any sort of broad liquidation of their portfolios of mortgage loans during the first nine months of 2007, and aggressive increases in those portfolios were similarly rare.
Life insurers hold the vast majority of the mortgage loans owned by the industry. Indeed, 17 life companies individually held loans worth more than the P&C industry's sum of $4.6 billion as of Sept. 30, 2007. Overall, life insurers held mortgage loans worth a total of $306.8 billion as of the same date. At year-end 2006, mortgage loans represented 0.31% of the P&C industry's gross cash and invested assets versus 10.54% for the life industry.
As of year-end 2006, the P&C industry's gross investment in commercial mortgage loans amounted to 94.8% of its overall mortgage loan position. For life insurers, that ratio amounted to 83.9%, with single-family residential mortgages representing a mere 1.6% of total mortgage loans. Gross investments in multifamily mortgages and agricultural mortgages composed a combined 12.5% of the industry's overall sum of mortgage holdings. In all, P&C and life companies held $250 billion worth of commercial mortgages as of the end of 2006, all according to SNL data.
MetLife Inc. unit Metropolitan Life Insurance Co. had by far the largest position of any single insurance company in mortgages, overall, and in commercial mortgages, more specifically, according to SNL data, with total mortgage loans amounting to $36.07 billion and commercial mortgages of $27.58 billion as of Sept. 30, 2007. The vast majority of the difference, according to Metropolitan Life's third-quarter statutory statement, was comprised of loans classified as farm mortgages.
On a GAAP basis, MetLife, the holding company, reported $47.03 billion in mortgage and consumer loans on its balance sheet as of Dec. 31, 2007. Of that amount, $35.50 billion was composed of commercial mortgages, a position that company officials defended during a Feb. 7 conference call.
Chief Investment Officer Steven Kandarian described the commercial mortgage position on that call as a competitive advantage for MetLife. And he provided assurances that the company shifted its focus to production with lower loan-to-value ratios going back as far as 2005 in response to indications of aggressive lending activities in the marketplace.
"We are maintaining our disciplined underwriting approach in this market and continue to focus on lower-risk, high-quality mortgages," Kandarian said, pointing out that the company has been issuing commercial mortgages at a "55% kind of loan-to-value ratio" at "very, very wide spreads." Metropolitan Life acquired mortgage loans with total book value of $2.7 billion in the third quarter of 2007, according to its Sept. 30 statutory statement, on properties valued at $6.2 billion.
"We really were in a defensive posture in 2007," Kandarian said, given the company's belief that it wasn't being adequately compensated for the risks it was assuming. "Now, we're able to go into things we think still are high quality - A and above - but the spreads have really widened out because of dislocations in the capital markets." At the company's December 2007 investor day, Kandarian elaborated that spreads were wider than he had seen in years as a result of a freezing up of the commercial mortgage-backed securities market.
Nearly 40% of life insurance companies reported holding at least some amount of mortgage loans as of Sept. 30, 2007, while only about 5% of the P&C industry did so, according to an analysis of SNL's statutory data. But among companies holding mortgages, actions to increase or decrease those positions in 2007 seemed unspecific to a particular industry group, and upward and downward movements in mortgage loans relative to net admitted cash and invested assets were almost evenly split during the first nine months of the year. Between 2002 and 2006, the ratio of mortgages to cash and invested assets has ranged from a low of 0.28% to a high of 0.32% for the P&C industry and between 10.08% and 10.82% for the life industry.
