Life Insurance CRE Mortgages See 0.68% Total Return in Q2

According to Trepp and its LifeComps Index, participants have seen a total return of 0.68% in the second quarter of 2024. That includes 1.17% of income return reduced by -0.49% of appreciation return.

Given that a rate cut didn’t come until mid-September, performance in Q3 is likely to be the same.

Insurance companies tend to get involved with CRE financing through longer-term mortgages as a way of hedging against inflation while preserving access to cash at pre-determined times.

The LifeComps Index is a Trepp product that compiles historical commercial mortgage loan investment performance and uses it as a proxy for the CRE mortgages that insurance companies hold. The firm calculates quarterly time-weighted total return, income and appreciation returns, cash yields, and duration-adjusted yields. It also performs various types of analysis for each participant and the entire portfolio.

Trepp uses loan transaction data and lender valuations from participants, which doesn’t guarantee accurate market representation. However, it may be a case where what is available is all that one might find and, as such, is good enough by default.

The LifeComps participants had a slow origination volume because high interest rates acted as an off-putting influence on potential borrowers, as did “uncertain commercial real estate prospects.” Additionally, lenders experienced high funding costs as investors, whose investments would supplement capital from the insurance companies, would have been looking for high returns given yields on Treasurys setting a pricey no-risk alternative.

There were 163 new loans at $3.95 billion — a slight increase from the previous quarter. The value-weighted average coupon rate was roughly steady at 6.22%.

One of the paths for greater activity would be a decrease in interest rates as the Federal Reserve would see slowing inflation as a reason to make further cuts. However, this is not such a straight path, as Trepp acknowledged, noting that the Fed has advocated a “sober and moderated decline in rates” matching data coming in. At the end of September, Fed Chair Jerome Powell said: “This is not a committee that feels like it’s in a hurry to cut rates quickly. Ultimately, we will be guided by the incoming data. And if the economy slows more than we expect, then we can cut faster. If it slows less than we expect, we can cut slower.”

In terms of originations, Trepp had previously reported that bank-held CRE loans still faced headwinds despite modest origination gains. What is happening in life insurance — assuming the patterns Trepp has found in its group have broader applicability — might be part of a greater pattern in CRE lending.