U.S. Insurers Can Endure More Commercial-Property Declines, Barclays Says

U.S. life insurers, a group led by MetLife Inc., are able to withstand further commercial-property price declines because of the collateral cushions on mortgages written by most of the industry, Barclays Plc said.

Barclays projects real estate price declines of an additional 25 percent and “has actually reached an upbeat conclusion as far as the major life insurers are concerned,” analyst Eric Berg said in a research note today. U.S. commercial property values in April were down 41 percent from their October 2007 peak, according to Moody’s Investors Service.

Life insurers lend to owners of apartment buildings, office towers and shopping malls as part of their investment strategy. New York-based MetLife had about $35 billion in commercial mortgages at the end of the first quarter. For the same period, Prudential Financial Inc., the second-biggest U.S. life insurer, said it had about $30 billion of commercial mortgages and other loans. The two insurers said this year that property price declines may have ended.

If conditions in the “mortgage-lending market will worsen from here, the impact on all of the life insurers just won’t be that substantial,” said Berg, who’s based in New York.

Mortgage portfolios at Genworth Financial Inc., Lincoln National Corp. and Ameriprise Financial Inc. were the best positioned in the industry, according to the Barclays study. Principal Financial Inc. and StanCorp Financial Group Inc. had the greatest risk of losses and would suffer “material hits” to their shareholders equity if commercial property prices fall by a quarter, Barclays said.

Real Estate Losses

U.S. life insurers are facing an increase in losses on commercial mortgage loans after posting $1.5 billion of losses last year, Fitch Ratings said in a June 21 report. The firms may take an additional $4 billion to $5 billion of losses this year and next, Fitch said.

Principal, led by Chief Executive Officer Larry Zimpleman, had its credit rating downgraded by Standard & Poor’s in May on the prospect of mortgage losses. The “risk profile” of the loan portfolio at the Des Moines, Iowa-based insurer is higher than its peers, S&P said in a statement.

Principal braced for an increase in commercial-property defaults by more than doubling its provision against mortgage losses last year. Zimpleman said in an April interview that commercial property prices were starting to rise after the two- and-a-half year slide attracted investors.

To contact the reporter on this story: Andrew Frye in New York at afrye@bloomberg.net.

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