New York-based data and analytics provider Trepp is tracking an -11.84 percent decline in its LifeComps Total Return Index, the most significant decline seen in the benchmark’s more than 20-year history.
The total return for the index sector was down -4.07 percent in the third quarter, a drop of -3.55 percent from the previous quarter, and a level that helped bring the year-to-date total return of life insurance commercial mortgages to -11.84 percent.
Life insurance companies account for 12 percent of commercial real estate lending. As of Q2 2022, LifeComps commercial mortgage portfolios were growing at an annual rate of 9.1 percent, Trepp found. According to the American Council of Life Insurer, commercial mortgages account for $570 billion of their portfolios, which is 10.7 percent of LifeComps’ total assets.
“Unless there’re some significant developments in the market in the last month, 2022 seems inevitable to become the worst-performing year [for the index],” the report stated. The last biggest negative annual total return that index saw was a -4.14 percent drop during the Global Financial Crisis.
Trepp highlighted several factors that contributed to the decrease in the LifeComps total returns, including rising interest rates aimed at taming high inflation. As the Federal Reserve has raised interest rates by 75 basis points at its last four meetings, the benchmark 10-year Treasury has seen a commensurate increase. Yields on the 10-year Treasury rose from 2.98 percent on June 30 to 3.83 percent on September 30, and the five-year Treasury rate rose from 3.01 percent to 4.06 percent within the same quarter.
“The main impact on LifeComps returns is from long-term interest rates,” Trepp analysts noted. There are two possible scenarios going with changes in regard to changes in the interest rates environment. When the Federal Reserve stops raising rates, the stabilized long-term yields should lead to positive returns again. If the interest rates start to fall, that will become a tailwind for LifeComps returns with appreciation boosting the income portion of the return, Trepp says.
November CPI has signaled a lower-than-expected inflation scenario, which sent the yield on the five-year to 3.80 percent by the end of the day on December 5. Federal Reserve chairman Jerome Powell also indicated that the US central bank might slow down the pace of hiking the interest rates in December.
Mirroring the general landscape of the commercial mortgage lending and transaction market over the past three to six months, the origination of loans for the LifeComps portfolio slowed down too. New loans funded in Q3 dropped by 28 percent from the previous quarter, which is also a 29 percent down year over year.
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