Insurers Face 'Pain' From Commercial Loans, S&P Says (Update3)

By Andrew Frye
Bloomberg News
May 20, 2009

May 20 (Bloomberg) -- U.S. life insurers, a group led by MetLife Inc. and Prudential Financial Inc., face "pain" on more than $300 billion invested in mortgages tied to commercial property and multifamily homes, Standard & Poor's said.

"As the recession rolls on, we believe that there is an increasing possibility of distress for commercial real estate owners and for those that hold their mortgages," said S&P analysts led by Kevin Ahern in a statement today.

North American insurers have posted more than $200 billion in writedowns and unrealized losses tied to the collapse of the U.S. mortgage market. The losses, concentrated in home loans, corporate debt and derivatives, may expand into commercial mortgages as borrowers default or let loans go into foreclosure, S&P said.

"The foreclosure rate of commercial mortgages in life insurance portfolios is virtually zero," S&P said. "But we believe that this will not necessarily be the case over the course of this economic cycle."

Commercial mortgage delinquencies in the U.S. climbed to the highest level in at least 11 years in April as scarce credit made it difficult for landlords to refinance loans, according to property research firm Trepp LLC. Commercial property values fell 21.5 percent through February from their October 2007 peak, according to Moody's Investors Service.

MetLife's Holdings

MetLife, which holds about $36 billion in commercial mortgages, reported this month that falling property prices were causing the average loan-to-value ratio of its portfolio to rise, an indication that full recovery in a foreclosure is less likely. Delinquencies "have been minimal," and MetLife took a writedown of less than 15 percent on a loan it foreclosed on in April, Chief Investment Officer Steven Kandarian said on May 1.

Investment losses and the prospect of more to come have pushed S&P to reduce its ratings on MetLife, Prudential and rivals including Lincoln National Corp. and Hartford Financial Services Group Inc. this year.

Insurers have cut jobs, slashed dividends and sold shares to replace capital. Newark, New Jersey-based Prudential, Lincoln of Philadelphia and Hartford, based in the Connecticut city of the same name, were among the insurers cleared this month for capital from the U.S. financial-firm rescue program.

The 11-company Standard and Poor's Supercomposite Life & Health Insurance Index has dropped by half in the past year, with MetLife slipping 50 percent and Prudential down 46 percent.

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