Life insurance companies have been active investors in commercial mortgage loans for more than 100 years. CMLs are utilized to effectively match assets and liabilities for life insurance companies, while also achieving risk-adjusted yield premiums and adding diversification within their fixed-income portfolios. At the end of the third quarter, life insurance companies held $454 billion, or 15%, of the total U.S. CML debt outstanding, according to the Mortgage Bankers Association, and allocated about 12% of assets to CMLs, according to S&P Global Market Intelligence.
That said, defined benefit plans in the U.S. hold minimal allocations to the asset class. Despite the ongoing search for new sources of yield, Federal Reserve data indicate direct allocations by private and public pension funds to commercial mortgage loans is only 0.2%. In the current market environment of low yields and tight credit spreads, it might be an opportune time for pension plans and their investment consultants to consider commercial real estate debt.