Spotlight on Life Insurance Financing
This month’s spotlight focuses on financing from life insurance companies also known as LifeCo lenders or LifeCo financing. Supported by their large portfolios and annual inflows of insurance premiums, life insurance companies have been a leading source of long-term, fixed-rate financing for senior mortgages. Due to their conservative standards in loan underwriting, life companies had fewer bad loans to work out after the 2008 financial crisis. This also meant that they held a strong capital position and were able to expand their share of the real estate debt market. While still conservative in nature, life companies are able to draft customized financing products for clients that other lenders often cannot.
For life insurance loans, lenders have continued and even strengthened their conservative approach toward underwriting the cash flow of the collateral and sponsors. As part of the
underwriting process, insurance companies are simultaneously assessing the risks of default while trying to minimize such risks, so they require detailed borrower and property information. Underwritten cash flows are based on “in-place” income and rents rather than anticipated income or further rent escalations and leases are analyzed with closer scrutiny to ensure market rates. Insurance loans require a more conservative loan-to-value (LTV) ratio with maximums for most lenders between 60–75%, and a debt service coverage ratio (DSCRs) of at least 1.25–1.35x. Life insurance companies are also underwriting loans with an anticipated debt yield (net operating income/loan amount) of at least 8%. Additionally, borrowers should expect to have cash equity invested in their projects, while being able to maintain a reasonable post-closing liquidity.