Insurers' next headache? Commercial-mortgage defaults, says Fitch

Already under pressure from credit rating agencies, U.S. life insurers are about to be rocked again — by defaults on their investments in commercial real estate and mortgages, according to a report from Fitch Ratings Ltd. Unless the commercial real estate market recovers, Fitch estimates that commercial-mortgage-backed securities of recent vintages will suffer losses that average out to about 9%. The ratings firm expects pressure on the securities and other non-AAA rated bundles of commercial mortgages to rise sharply next year. Fitch projects the potential losses from commercial-mortgage-backed securities owned by life carriers to be between $13.1 billion and $16.0 billion. Directly-placed mortgages will generate $5.4 billion to $6.6 billion in losses through 2011, under Fitch's core stress scenario. As of the end of 2008, Fitch's universe of life carriers had about $308 billion or 12% of invested assets in directly-placed mortgage loans. Exposure to commercial mortgage-backed securities, including collateralized-debt obligations comprised of commercial real estate, topped $150 billion or 5.8% of total invested assets at the end of last year, according to Fitch. However, most of the securities were investment-grade, as less than 2% of invested assets were in high-yield securities at the end of 2008, according to Fitch. Fitch also notes that the steep declines in statutory capital over the last 18 months have hobbled the insurers' ability to get through an extended downturn. To date, the life insurers have not recognized material impairments or losses on investments related to commercial real estate, according to Fitch.