05/07/2010

After Big Lending Dip in '09, Insurers Revive

Lending by the largest insurance companies slumped sharply for the second straight year in 2009, but the industry is now back in a growth mode.

Originations by the 30 insurance organizations with the largest mortgage portfolios plunged by 41% in 2009, to $22.4 billion, according to Commercial Mortgage Alert's annual survey of lending by life insurers (see ranking on page 10). That was on top of a 35% decline in 2008. The upshot: Annual lending plummeted by $34.4 billion from the peak of $56.8 billion in 2007.

All but three of the Top 30 firms posted a decline in originations last year. MetLife regained the title of most-active originator, even though its volume slipped by 26%, to $3.4 billion. Allstate ranked second, with $2.44 billion of originations, followed by Prudential ($2.38 billion), John Hancock ($1.5 billion) and Pacific Life ($1.4 billion).

But all signs indicate that the tide has turned. Across the board, insurers have captured many of the best lending opportunities that have emerged so far in the recovery, and a handful of firms plan to double their originations this year.

The origination decline in 2008 and 2009 mirrored the freeze in the capital markets at large. "There were limited opportunities," said one veteran insurance-company lender. "Investment-sales volume had fallen dramatically from the peak in 2007, and there was little in the way of construction loans maturing that had enough leasing to convert to a permanent loan."

Added another longtime lender: "Spreads were wide and rates were high during that period. Many borrowers avoided refinancing their loans if they could through the second and third quarters."

In the first half of last year, rates hovered around 8% even on relatively low-leverage loans. But the market started to turn in the third quarter when a number of REITs were able to begin tapping the stock and corporate-bond markets for capital. "That seemed to prime the pump," said one lender.

Mark Wilsmann, head of MetLife's commercial mortgage operation, noted that lending activity started to pick up in the fourth quarter as spreads and rates fell and as property owners "came to grips with new valuation levels." Still, he added, "most activity in 2009 was from the refinancing of existing maturing loans in insurers' portfolios."

Now, however, insurers are opening the spigots again. Competition among lenders for the limited supply of properties that qualify for refinancing has led to lower rates and higher proceeds for borrowers.

MetLife has nearly doubled its origination target for this year, to $6.5 billion. Northwestern Mutual expects its activity to more than double, to $3.5 billion from $1.4 billion. And TIAA-CREF will nearly double, to $2 billion.

Some securitization shops are hoping that insurance companies hit their allocation levels before long, opening the door for them to capture more business. But some insurers think that is unlikely to happen.

Bill McPadden of John Hancock said that as long as commercial mortgages continue to generate yields that compare favorably to other types of assets, his firm would be willing to fund new loans. "There is good relative value in mortgages right now, as compared to bonds," he said. "If we hit our target [before the end of the year], we will be allocated additional money for investment."

There is a looming factor that could put a damper on lending - tougher capital-reserve requirements being proposed by the National Association of Insurance Commissioners. If the regulatory body has its way, insurers will be forced to set aside capital reserves equal to 4% of the face value of loans on average, up from the current 2.6%. That would make lending considerably more expensive and could force some firms to shift some capital into other types of investments.

Nonetheless, insurers are generally upbeat about the lending outlook, especially compared to the atmosphere that prevailed in 2008 and most of 2009. "For the most part, insurance lenders' commercial mortgage portfolios are in relatively good shape," said Wilsmann. "Delinquency rates for insurance companies are still below 1%, versus 8% for the commercial MBS market. This, combined with the recent bottoming of real estate markets and more positive outlook for fundamentals, is positioning insurers to be active lenders for the foreseeable future."

The ranking is based on regulatory filings by insurance companies. Volumes reflect consolidated data for each insurance organization, rather than totals for individual affiliates. Farm mortgages and single-family loans are excluded. The figures reflect only loans that were closed and funded. Forward commitments aren't counted.

Allstate was the only Top 5 firm to buck the trend. Its originations more than tripled, to $2.4 billion, according to its regulatory filing, but there were indications that the figure was an accounting anomaly, rather than a direct increase in lending. The insurer's overall portfolio declined by 3%, to $7.7 billion. An Allstate spokeswoman declined to comment.

MetLife has the largest portfolio, at $33 billion, followed by Pru ($22.9 billion) and Northwestern Mutual ($21 billion).

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