CRE Finance Council (CREFC) and Trepp LLC have released the results based on the next version of the Trepp/CREFC Portfolio Lender Survey of commercial mortgage investment performance within the insurance company sector. The survey was used to gather previously unavailable industry data for use in assessing investment performance during the downturn and for general benchmarking purposes. Insurance companies, representing nearly half of the industry's total mortgage exposure with $135 billion in combined commercial mortgage assets, took part in the survey. Participating companies contributed data for the first and second quarters of 2012, covering both their General Account and any subsidiaries, in order to fully capture performance, including any sub-performing or non-performing loans in subsidiary entities.
"These results provide clear evidence of extremely solid investment performance within insurance company portfolios," asaid Todd Everett, managing director and head of the real estate fixed-income division at Principal Real Estate Investors and Chair of CREFC's Portfolio Lenders Insurance Company Sub-Forum. "They also demonstrate the reasons we are seeing increasing allocations in commercial mortgages from this sector. The lowering level of losses and minor levels of high risk seem to indicate that insurance companies are benefitting from the recovery in real estate fundamentals."
Key data points from the survey (all as of Q2 end 2012) include:
►Mortgage Exposure Held: The average commercial mortgage holdings of companies participating in the survey was 10.70 percent of total invested assets, ranging from a high of 17.28 percent to a low of 4.04 percent.
►Total Realized Losses: Total realized losses from the commercial mortgage holdings of participating companies retreated to a level of only five basis points, with no companies reporting realized losses greater than of one percent. This is a loss rate typically associated with very high-quality corporate bonds.
►Losses by Investment Type: In comparison to year-end 2011 where 83.24 percent of realized losses came from first mortgage investments, 14.10 percent from subordinated debt instruments, and 2.66 percent from construction loans, the end of Q2 2012 data demonstrates realized losses being composed entirely of first mortgage investments-at 100 percent.
►Loss Severities Experienced: The severity of realized losses for insurance companies (when a loss was recorded in periods Q1 & Q2 2012) averaged only 7.70 percent of the par balance for first mortgage investments, which is down 1.49% from year-end 2011.
►Losses by Property Type: As of Q2 2012, the office property type accounted for 49.62 percent of all realized losses from participating companies followed by retail at 23.75 percent, Industrial at 18.86 percent, multi-family at 3.81 percent and hotels at 1.70 percent. There is a large drop in realized losses coming from multi-family-declining by 19.62 percent from 23.43 percent at year-end 2011 to 3.81 percent at the end of Q2 2012.
►Loss Severities by Property Type: Loss severities ranged from a high of 12.94 percent for retail to a low of 3.17 percent for multi-family. Office, hotel, and industrial loss severities were recorded at 7.27 percent, 8.83 percent, and 11.99 percent, respectively.
►Actions Taken On Problem Loans: For the realized losses that were recorded, distressed note sales accounted for 47.56 percent, foreclosures at 23.62 percent, discounted payoffs at 15.65 percent and write-down(s) at 13.17 percent. No losses were recorded from both non-distressed sales and restructures. Realized losses arising from distressed note sales rose significantly by 30.4 percent from 17.16 percent at year-end 2011 to 47.56 percent as of Q2 2012.
►Delinquencies: Total loan delinquencies (30 days or greater) recorded by participating companies within their general account holdings and subsidiary entities averaged 0.35 percent. This is down eight basis points from year-end 2011.
►Other Portfolio Statistics: The average commercial mortgage loan-to-value held within participating company portfolios is 59.1 percent at the end of Q2 2012. Approximately three percent of loan exposure for all companies is above a 100 percent loan-to-value. The average debt service coverage ratio within portfolios is 1.8 times. Also, 93 percent of all exposure held was above a 1.0 times debt service coverage ratio. All of the above mentioned figures have remained relatively unchanged since year-end 2011.
"I am excited that we have now completed our second performance survey. This previously unavailable information helps us as an Association provide value to the insurance company sector," said Stephen M. Renna, CREFC's CEO.