Grim future awaiting U.S. life insurers

If there is no change in the coming days (it must occur before long too), a grim future is awaiting U.S. life insurers. The situation, without a shred of doubt, is grave and on the word of Fitch Ratings, the group under the joint auspices of MetLife Inc. and Prudential Financial Inc., may face $15 billion in extra commercial real estate losses, the majority of which will be identified in the following two years.

In accordance with Douglas L. Meyer, a Fitch analyst, the life insurers have by now booked in the region of $5 billion in such losses ever since the commencement of the economic crisis, bringing the expected total to $20 billion. Most future losses will be taken this year and in 2011, he said. In a note written to clients, in particular, Fitch stated with conviction, “The U.S. life industry has a large exposure to CRE- related assets through direct mortgage origination, investments in commercial mortgage-backed securities, and to a lesser degree, investment in real estate equity.”

The default rate for commercial mortgages bundled and sold as bonds rose 0.42 percentage point to 4.71 percent last month and may climb to 12 percent in 2012, Fitch said on Jan. 11. What is MetLife, the largest U.S. life insurer, doing then? It has come to the knowledge that Met Life has approximately $50 billion of its $338 billion portfolio in commercial property loans and CMBS.

This is also imperative and make a note of this too. Fitch said, life insurers suffered nearly $60 billion in aggregate investment losses during the financial crisis through September, with $30 billion to $35 billion more to come. Meyer said commercial real estate will account for a bigger portion of those losses.

“Losses in commercial real estate tend to lag behind losses in other asset classes in an economic downturn,” said Meyer. “Commercial tenants tend to have longer term leases, so it takes longer for the losses to show.”