US life and annuity insurance companies have seen a dramatic increase in commercial mortgage loan holdings over the past five years, leading to an increased exposure to low quality credit, according to a recent report by AM Best.

US life and annuity insurers now hold more than $522 billion in commercial mortgage loans, which is up significantly from $382 billion in 2015. The report also said the 2019 figure represents an 8% increase year-over-year.

Although favorable GDP growth, low unemployment and rising retails sales during 2019 had boded well for the holdings, more recent trends in commercial properties show developments may lead to further percentage declines in the holdings, the report said. In particular, the report noted that hotel and motel properties, which make up 4% of the life and annuity insurer's commercial mortgage loan investments, are expected to come under pressure until the global economy begins to emerge from the COVID-19 pandemic.

According to the report, hotel properties in particular are experiencing unprecedented vacancy rates, while retail and office properties are also experiencing significant drops in revenue, which could further deteriorate the quality of credit. This trend could also affect the performance of other mortgage-backed assets, such as commercial mortgage-backed securities.

"As the pandemic leads to loan forbearance, along with remote work forces and travel restrictions, the potential for deterioration in credit quality grows," AM Best said in a press release about the report. "However, L/A insurers' low exposure to hotels will help minimize the impact. Instead, insurers will feel the impact of longer-term pandemic conditions through accelerated loss recognition, leading to pressure on GAAP earnings."

AM Best, which is a global credit rating agency specializing on the insurance industry, also said it will closely monitor insurers with higher credit mortgage loan exposures relative to their total statutory surplus.