Large US life insurers feel impact of commercial real estate concerns

Shares of many large US life insurers underperformed leading indexes through the third quarter in contrast to some of their smaller peers.

Lincoln National Corp., Principal Financial Group Inc. and MetLife Inc. were among those that experienced the steepest stock declines year to date, falling 19.6%, 14.1% and 13.1%, respectively. By contrast, the S&P 500 posted an 11.68% gain through the third quarter, and the S&P 500 US Insurance Index grew 1.01%.

On the flip side, several smaller life insurers experienced stock gains, such as Midwest Holding Inc., F&G Annuities & Life Inc. and Unum Group.

Poor performance by some of the life market's major players came amid investor concerns over the potential vulnerability of life insurers' commercial real estate portfolios. Continued negative press surrounding the valuations of office buildings and certain other property types has persisted throughout the year as employers continue to evaluate their approach to remote working.

"Generally there's been concern about commercial real estate this year," Piper Sandler analyst John Barnidge said in an interview. "That's impacting the group generally and impacts companies with spread-based exposures more."

Barnidge noted that several of the big names trading down in 2023 had an "extremely strong stock" in 2022, pointing out that following up a strong year with another strong year can be difficult.

The analyst added that some of the major players faced individual challenges. For example, Lincoln's $28 billion deal with Fortitude Reinsurance Co. Ltd. was supposed to close during the second quarter but did not, and it has faced difficulties with its mortality earnings and spread-based business that likely had an impact on the stock's price as well.

In terms of life insurers that have performed well during the year, many of them are getting acquired, which is causing them to trade higher, Barnidge said.

For example, Midwest Holding logged the greatest gain, with its stock growing 105.3% in 2023 through the third quarter. The company said in July that an affiliate of international investment firm Antarctica Capital LLC would acquire Midwest for $27 per share in cash.

Strong diversification

Even with concerns surrounding commercial real estate, US life insurers are largely expected to weather commercial real estate deterioration as their investment portfolios are stable.

Similarly, most of the loans on their books were in good standing as of June 30, despite a spike in other-than temporary impairments on mortgages in the second quarter.

US life insurers have investment portfolios that are "fairly well diversified" in terms of geography and product type, said Mike Siegel, global head of the insurance asset management and liquidity solutions businesses at Goldman Sachs Asset Management LP.

Siegel expects insurers to see losses in the office portion of their commercial mortgage portfolios, but the impact is unlikely to be material overall.

"I don't think it will cause any of these companies to have significant overall losses or impair ratings or capital," Siegel said in an interview. "But there's no doubt that there will be losses taken on the office part of the loan portfolio."

Siegel expects insurers to generally try to extend loans or restructure and reduce interest rates as they will likely be looking to avoid foreclosure and take on the responsibility of managing the real estate.

Whenever an insurer has to restructure a loan, it gets marked down to its market value, resulting in a loss.

In an October note, Fitch Ratings also concurred that US life insurers are not "currently at risk" from commercial real estate exposure.

"Life insurers' significant capital and short-term liquidity make them unlikely to be forced sellers of real estate assets at distressed valuations," Fitch said, adding that any commercial real estate losses are expected to "remain within ratings sensitivities."