Moody’s Investors Service says U.S. life insurers could post commercial real estate losses of up to $11 billion over the next three years, but will not be hit as badly as banks and other investors, Reuters reports.
While the losses — estimated to be between $9 billion and $11 billion — will likely “dampen” earnings, Moody’s said it was unlikely to result in many ratings downgrades for insurers, according to Reuters.
Moody’s ratings arm, in a special report, said they believe the high quality of life insurers’ holding of commercial mortgage loans and commercial mortgage-backed securities will result in lower losses than for banks and others that invest in this market.
“Insurers’ investments in CMBS are primarily originally AAA-rated tranches with modest exposure to recent problematic vintages of 2006 to 2008,” said Moody’s.
Moody’s said if the market deteriorates in an “unprecedented” way, the sector’s losses could be four times as high, Reuters reported. Although not expected, such a development would have a capital impact and result in downgrades, the firm said.
The slump in the U.S. commercial real estate market followed the downturn in the nation’s housing sector and experts forecast it could drag out for several years.
The default rate for commercial real estate loans held by banks reached the highest in 16 years in the third quarter and is expected to worsen, according to research firm Real Estate Econometrics.
After fixed-income debt, commercial real estate is the next largest asset class invested in by U.S. life insurers such as MetLife Inc. and Prudential Financial Inc. The companies, which have operations in Hartford, expect losses to be limited by the high quality of their portfolios and to be spread out over time.
Moody’s said potential losses would also be mitigated by the ability of insurers to work with borrowers to extend or refinance loans.
Reuters reports some insurers have already been able to cut the risk of losses by asking mortgage holders to put up more collateral, or to refinance on terms more favorable to the lender.
