Fitch Ratings expects life insurers in the United States will report a material increase in credit-related losses on commercial mortgage loans in 2010 and 2011. This projection is in contrast to Fitch's expectations for moderating investment losses across all other major asset classes. To the extent that commercial mortgage loan losses are contained within Fitch's base case loss projections, further downgrades of the ratings on U.S. life insurers should be limited.
Realized losses in 2009 on directly placed mortgages totaled $1.5 billion, or 0.46 percent, versus Fitch's base case loss projections of approximately $6 billion, or two percent over the cycle, implying additional losses of $4 billion to $5 billion to be taken in 2010 and 2011. Fitch notes that approximately 99.6 percent of mortgage loans held by U.S. life insurance companies were in good standing at Dec. 31, 2009, which represents significantly better performance compared to both the CMBS market and the mortgage loans held by banks.
While Fitch believes that reported rates of mortgage loan delinquencies, foreclosures, and restructurings may be a less meaningful measure of performance in this cycle due to increased active management of mortgage loan portfolios (i.e., loan sales), these traditional performance measures are expected to show a significant deterioration in 2010 and 2011.
The full report "Meeting the Test: Life Insurers' Mortgage Snapshot" is attached below. This report briefly reviews the holdings and performance of directly placed mortgages of U.S. life insurance companies through year-end 2009 in context of Fitch Ratings' core stress tests and outlook for 2010 on ratings.
For more information, visit www.fitchratings.com.