AM Best webinar recording: Private real estate lending for insurers

Note: This transcript was auto-generated and may contain minor transcription errors or typos.

John Weber: [5:43] Welcome to our webinar, "Real Estate Lending and Insurance Capital, Opportunities in a Reset Market." I'm John Weber with AM Best. As market volatility reshapes traditional fixed income allocations, insurers are increasingly turning to private real estate lending for yield, diversification and capital efficiency.

[6:08] In this webinar, representatives from SLC Management and BGO will explore how real estate credit fits within insurance portfolios, the evolving risk landscape, regulatory considerations and where today's most compelling opportunities are emerging. In a moment, I'll introduce today's speakers and the firms that they represent.

[6:30] Now, we may mention the subject of financial strength ratings, a full explanation of AM Best ratings can be found on our website at ambest.com. The opinions expressed by our panelists are theirs and theirs alone and do not necessarily reflect the opinions of AM Best.

[6:49] If you have a question for our panelists, please use the question feature on your screen and we'll do our best to recognize it during our program today. We would like to thank SLC Management and BGO for sponsoring today's webinar. Now let's meet our panel. Our speakers today reflect the combined strengths of both firms.

[7:11] Pramit Mukherjee is Managing Director, Insurance Client Solutions at SLC Management, where he develops capital efficient investment solutions for insurers across structured private finance, private credit and real estate mortgage investments. He brings 15+ years of asset management experience, including leading US pension risk transfer and protection portfolios at Legal and General America.

[7:39] Pramit holds an MBA with distinction from NYU Stern and degrees in industrial engineering from IIT. Pramit, so glad you could join us today.

Pramit Mukherjee: [7:50] Glad to be here as well. Looking forward to it, John.

John: [7:52] I am too. Joining Pramit is Abbe Borok, Managing Partner and Head of US Debt at BGO, where she leads the firm's US debt platform across core, core-plus and high yield strategies. Abbe brings 20 years of commercial real estate capital markets and investment management experience, including leadership roles at the Amherst Group and Capital Source.

[8:18] Abbe holds an MBA from Columbia University and serves on the board of governors at CREFC. Abbe, thanks so much for joining us today.

Abbe Borok: [8:27] Thanks so much for having us, John.

John: [8:30] Now a quick look at the organizations behind today's discussion. SLC Management is a global institutional asset manager. It offers traditional alternative and yield oriented investment solutions across public and private fixed income, as well as global real estate equity and debt infrastructure equity.

[8:53] BGO, part of the SLC Management Group of Companies, is a global real estate investment management advisors and lender serving more than 750 institutional clients. With offices in 25 cities across 12 countries, BGO combines local market knowledge with global real estate equity and debt capabilities. With that, let's begin.

[9:19] Pramit, how are insurers currently incorporating private real estate lending into their overall portfolio strategy?

Pramit: [9:26] John, private real estate lending has always been a part of insurance companies' core portfolios. If you think about it based on most recent NAIC data as of year-end 2024, insurance companies had fairly good amount of exposure in commercial mortgage loans, mostly senior mortgage loans, core mortgages what we call, for example, in the life insurance world they're called CM1, CM2 mortgages.

[9:58] Now, the exposure to higher yielding mortgages has traditionally been very low on insurance company balance sheets. Now, we're going to get into more details as to why that could be and how that is a very important tool for insurance companies to consider.

[10:15] Staying with your question, insurance companies historically have grown their exposure to mortgages, but I think in the current market or over the past, call it, six to seven years, the different cycles we have seen has made it imperative for insurance companies to be very focused from a credit standpoint as well as a macro standpoint, build portfolio both with bottom up and top down perspective.

[10:48] As part of the portfolio construction process, they need to ensure diversification across different asset classes, they need to ensure a variety of factors, including matching their liabilities, matching rate volatility, or trying to cope with the liquidity profile these different investments can offer.

[11:12] Again, we're going to get into all these details, but just to highlight one key aspect that my colleague Abbe is going to talk about, Abbe and her team has done a great job of building up a franchise with tremendous focus on data science driven as well as inputs from the equity side of our business, which to me is a good template for managers to build a real estate debt management business and a type of business that can support generation of these kind of asset classes.

John: [11:53] Pramit, what role does real estate credit play alongside traditional fixed income and insurance portfolios today?

Pramit: [12:04] If you think about a traditional insurance portfolio, it's very corporate credit heavy. Core, core-plus fixed income forms the majority of insurance portfolios. Now, what has that resulted in? As I talked about over the past decade, we have seen a couple of cycles and core, core-plus fixed income becomes heavily correlated to these cycles.

[12:35] It could be events like spread widening or downgrade cycle that everything seems to move together and insurance companies are hold to maturity type investors, so it's not like they have the ability to trade in and out of exposures at a moment's notice.

[12:53] Coming back to my earlier point that creating diversification in portfolio is of paramount importance. That's where real estate debt or what I talked about, higher yielding real estate debt can be a very important asset class in the portfolio construction process.

[13:15] Now, a few things to highlight here what are top of mind for insurance companies again, at a super high level like credit. Most of the book is, think of it as senior unsecured credit, maybe some exposure to securitized. When you think about real estate mortgages across this credit spectrum, high quality as well as high yielding, they're all mostly senior secured loans.

[13:46] From a security standpoint, they're high quality. Number two, from a relative value standpoint, we all know corporate credit is super tight right now. There is barely any risk premium present in the corporate credit across investment grade or even in the below investment grade BB space, let's say.

[14:09] That's where a strategy which focuses on high quality senior real estate debt lending and also down the spectrum to a higher yielding part of the spectrum offers strong relative value compared to corporate credit.

[14:27] Lastly, I want to highlight that liquidity is very important for insurance companies because they need to forecast out liability cash flows and try to pay out claims using their asset portfolio. For example, for life insurance companies, they have a fair amount of allocation to illiquid securities.

[14:54] The real estate debt across the spectrum, also the higher yielding real estate debt can be a very good fit within that illiquid bucket, offering a real val while in strong enough credit protections. Swapping to the PNC and health side, on a similar lens, they have very large liquid credit portfolios.

[15:20] A little bit of exposure to illiquid strategies can actually enhance their portfolio yield and support their new business effort with profitability, with capital and surplus generation.

John: [15:33] Abbe, from an insurer's perspective, what makes private real estate lending attractive in the current rate environment?

Abbe: [15:44] As Pramit mentioned, John, core mortgages, investment grade fixed-rate mortgage loans on stabilized properties have been a core part of insurance company portfolios for a long time. We are continuing to see this broadening of the real estate allocation into higher yielding strategies such as core-plus and value-add lending.

[16:08] That's particularly attractive in today's interest rate environment. To start though, maybe I'll take a step back and explain a little bit what we mean when we say value-add lending on the real estate side because it is a segment of the market where we really see a growing opportunity set and are particularly focused on at SLC and BGO.

[16:29] Value-add lending is lending to very institutional borrower sponsors of commercial real estate -- owners, operators, developers groups with a track record, financial wherewithal, institutional quality borrower sponsors. We're providing a senior loan at a moderate attachment point in the capital stack.

[16:50] Think 65 to 70 percent loan to cost or attachment point for those borrowers to acquire or develop a real estate asset with a value-add business plan. What we like about this type of product in our interest rate environment like today is, one, these are floating rate loans. In a higher-for-longer interest rate environment, that's attractive. We are importantly putting floors in these loans as well.

[17:20] If our policy metrics change and interest rates begin to come down, we do have protection there. They're floating rate loans, moderate attachment point in the capital stack. We have contractual income, so it's primarily the interest is paid current every month. We are very focused on that downside protection.

[17:44] Where is the market today? How bad can that local real estate market get? We're still going to get all of our principal back on every loan. In an environment like today, we're increasingly seeing groups and our clients come to us and look at core-plus value-add lending as a really attractive portion of the market.

John: [18:08] How does private real estate lending compare with other private credit opportunities available to insurers?

Abbe: [18:15] This is a good question because we've been getting this a lot from our clients and investors, which is how should we approach real estate credit and think about real estate credit in the context of some of the noise that we're seeing in the larger private credit markets, particularly the corporate credit markets?

[18:35] I think I'll make two points here. One, from a cyclical point of view, real estate credit looks very attractive. If you look at corporate credit, it is showing some signs of late cycle characteristics. Whether that's some high-profile bankruptcies, redemption queues, you are beginning to see some noise in that market.

[18:58] I think there's a healthy debate about that noise, how it's going to translate into performance going forward, and that's where manager selection's super important. I think you can see a pretty stark contrast between real estate credit and corporate credit just from a cyclical perspective.

[19:17] On the real estate side, the market had a number of corrections to date. You could see that from an asset class perspective with retail real estate coming out of the GFC, there was a correction there. You can see it with the office asset class coming out of COVID. Then more recently, more broad based with the 2022 interest rate rises, you've seen that correction.

[19:43] We feel like in most asset classes and markets, particularly in the US, you're in some level of recovery in the real estate markets. Now that's also good on the equity side. BGO has a very large equity book that informs a lot of what we do on the debt side as well. However, you do have an overlay now of some macro volatility.

[20:04] Having the downside protection associated with debt, real estate credit is also very attractive. From just a cyclical perspective, it does feel like real estate credit is a bit undervalued when compared to other segments of private credit.

[20:22] Maybe more importantly though, I would say on the structural side, there are also quite a few comparisons of real estate credit to corporate credit where first and foremost, and maybe this is stating the obvious, but we have a hard asset as our security.

[20:36] We have a lot of transparency and certainty around the collateral that we have on our loan in a downside, which is what we're always thinking about as lenders, we can step in there. Importantly, when you have a manager like BGO or others that have a large, strong equity platform, we take comfort in that hard asset because we know we could step in if we needed to.

[21:02] We could formulate a business plan and find a way to create value there. That transparency and simplicity of the collateral, particularly in a high downside, we think is an attractive point as well. How does real estate credit fit into a portfolio? Groups approach it from different perspectives, whether it's part-yield enhancement for their fixed income portfolio, whether it's downside protection in their real estate portfolio.

[21:32] More and more, we're seeing it approach from the private credit perspective. I think there are a lot of differentiators in ways that it can be an attractive segment of that overall allocation.

John: [21:44] Abbe, where are insurers finding the most compelling opportunities in today's real estate lending market?

Abbe: [21:54] We think that there are several compelling areas of the market driven by a couple of different themes. One is that we see the opportunity set expanding in the current environment. I'll talk a little bit about that. Second of all, we've seen a continued retrenchment by more traditional providers of real estate debt capital in the markets. When I say that, I'm particularly focused on banks.

[22:23] I'll spend a little time on that as well. Then finally, this recovery in the equity markets is a pretty tremendous argument for why real estate credit now. I'll start with just the bank retrenchment. We have seen this continued pullback from banks and over the last 15 years from the GFC. There's some argument that we're seeing some return of the banks to the real estate capital markets.

[22:57] However, at a much lower attachment point in the capital stack, there's been a permanent credit culture shift in many of those regulated financial institutions. Alternative lenders like ourselves have been able to step into that space and continue to provide very moderate levered loans, real downside risk protection, tight structures on many of these loans as an alternative and fill that gap in the market.

[23:24] We see that just continuing over time. I'd say, additionally, just on the expanding opportunity set, because of this recovery in many real estate markets, particularly in the US, there is an expanding opportunity set, and I'll segment that into two areas. One is on the asset class side.

[23:44] Over the last cycle, most of the opportunities that we've seen that we felt were investable on the debt side were in the residential and industrial space, logistics, multifamily, asset classes that we have been able to see demographic and secular trends as tailwinds. However, increasingly, some asset classes that have not been as investable are becoming more so.

[24:11] The opportunity set from an asset class perspective is increasing. This can include office transactions. We're seeing a recovery in some office markets, particularly focused on primary markets in the US. This can be in the retail space where we're seeing real outperformance as an asset class.

[24:30] Some of these are also niche asset classes or subsets of the residential and industrial space where we are particularly well positioned to find opportunities given the scope of our real estate equity platform. Some example of that would be in the multifamily space. We've been active in the student housing or seniors housing segments of the market.

[24:52] In industrial, that can be manufacturing where we've seen some trends for reshoring. That's a lot, and that's very heavy on the real estate, but some interesting opportunities that are expanding the opportunity set from a real estate asset class perspective.

[25:07] We're also seeing that across markets in the US as well, where I mentioned primary markets, we're seeing more of a broad-based recovery in markets like New York and San Francisco, Chicago, and also continuing to see a burn off of supply. Real estate has contended with some oversupply in certain markets through this last correction.

[25:30] In certain markets where we had that supply, there has not been as much new supply introduced. We're beginning to see absorption of that. That's a lot on the real estate markets. I wanted to get that out.

[25:42] Suffice to say it's an interesting opportunity set that we see in front of us because of some of this pullback by more traditional lenders, because of the recovery in the real estate equity markets and some of these more nuanced expansion opportunities as well.

John: [26:00] Thanks, Abbe. Just a reminder to our viewers, if you have a question for Abbe or Pramit, please use the chat feature on your screen and we'll do our best to recognize it during our program. Pramit, how significant are regulatory capital considerations when allocating to real estate credit?

Pramit: [26:18] It's very significant. Everything insurance related is ultimately the capital which costs to get access to an asset class. Insurance companies, over decades, have been -- for most of them -- very prudent with capital preservation. To Abbe's point, downside protection, it's always been the mantra.

[26:47] The regulators have also been thoughtful about creating a credit box or the limitations or applying penalties if certain asset classes were allocated to back liabilities or to an insurance portfolio via a very heavy capital charge.

[27:06] As a result of this, the way the insurance portfolio construction has evolved over the years, it has always focused on the lower end of the spectrum, which will incur low capital charge, rather than truly trying to optimize across all asset classes, across liquidity and across having exposure to Abbe's point, less correlated asset classes like real estate debt value-add lending.

[27:38] To take a step back and understand some of the regulatory considerations or the differentiation across types of insurers, for any type of real estate debt investments or mortgage investments, life insurance companies in the US, they get a look-through treatment. They get to take credit for every single mortgage in their portfolio based on the loan-to-value or LTV and the debt service coverage ratio or DSCR.

[28:10] There is a grid, it's called the CM scale, commercial mortgage scale, and to reiterate, the value-add strategy that we are talking about here fits within the CM2 or CM3 on that scale, which is basically investment grade to just below investment grade. That actually consumes pretty low capital charge. All the disclosures are publicly available on NAIC's website.

[28:41] If you think about it from a portfolio construction standpoint, you're optimizing on a risk, on liquidity, on capital adjusted returns. Value-add screams of optimizing and generating profitability and improving portfolio yields from that portfolio construction lens.

[29:03] Slightly taking a shift not really across the pond, but Mid Atlantic to Bermuda, under the Bermuda Capital Regime or the BSCR, commercial mortgages or real estate debt across core-plus, core value-add, they get treated the same way on an unlevered basis. Their capital charge there is also fairly attractive for Bermuda-based insurers to consider.

[29:34] The value-add lending strategy is actually a good fit for Bermuda-based insurers as well under their capital regime. It should be fairly high on a capital-adjusted return basis, definitely beating most of their, call it, core type asset classes within fixed income as well as private credit, while all the good features that Abbe talked about from a credit standpoint.

John: [30:00] Pramit, how do these investments help insurers improve capital efficiency?

Pramit: [30:07] It's an interesting question. Still a few parts to it. One is the opportunity cost. That's how I would like to put it. If not real estate debt, if not value-add bridge lending, what else? The other form of comparable private credit or other form of real estate equity like strategies they are accessed through what we have seen in the industry, through a fund format, an SMA format, or sometimes even through other forms like partnerships, JVs, REITs, and so on and so forth.

[30:53] We've seen this over the years evolve in the industry, but while delivering some yield, those vehicles may not always be as capital efficient. What we have seen in the industry is over the years within private markets, certain types of structures have evolved, and these industry structures we have seen include rated notes, for example.

[31:25] That can offer better capital treatment depending on the structure and other features and the capital regime as well, US versus Bermuda, versus other capital regimes.

[31:40] Again, putting it back to your point, gaining access to more capital efficient structures to ultimately get to value-add lending like strategies is very attractive for insurers because that can save them in terms of capital or what I would like to quantify as capital adjusted return per capital spend or just a unit of yield or spread per capital spend. Again, insurers can come up with their own metrics to quantify the risk.

[32:20] Another thing I would like to point out is a lot of insurers might be challenged in terms of the sheer manpower. They don't have an army of operations folks, analysts, or PMs looking at every single loan, every single CUSIP within a portfolio at all times. The operational complexity can also add up as insurers are moving more towards private markets, which we have seen as a trend over the years.

[32:56] Gaining access to a strategy, as I said, again, over the industry, it has evolved, written notes, can reduce such operational complexity because it synthesizes a loan portfolio into a couple of bonds, which are private bonds, CUSIP, and a residual tranche. You are not dealing with individual loan level line items, valuation, accounting. You are dealing with the implications for the structure.

[33:28] Here are some of the ideas, again, as for the industry that we have seen insurers move towards over the years for higher capital adjusted returns, capital efficiency, as well as operational efficiency.

John: [33:43] Abbe, what differentiates successful real estate lending strategies in insurance portfolios?

Abbe: [33:51] Pramit touched on a few of these points, but I think being able to deliver a more simplified vehicle or way to invest into value-add lending is compelling. It is pretty high touch lending at the real estate level.

[34:10] Having a manager that not only has a large broad-based debt platform and ability to penetrate the market there but also is partnered with a large equity platform that allows us to benefit from the boots on the ground, the teams we have in the local market, our ability to underwrite that local market and the many times it's down to the exact asset that we have knowledge in house is super important.

[34:41] Having that ability to underwrite that market, find someone on our team that not only usually knows the market and the submarket, but many times knows the asset, the comp set and the tenants that are in the market for that commercial real estate asset, and I'm seeking for BGO, provides us an ability to, we think, underwrite those debt positions in an even more granular way.

[35:08] To Pramit's point about correlation as well, having that asset level and that local market underwriting that we do on each deal. Well, we know that real estate can be affected by overall macro and interest rates. Having that real asset level exposure, we think provides that downside risk. In a downside scenario, we can step in. We can manage those assets. Importantly, we can look across our portfolio.

[35:41] BGO has 40 billion AUM of real estate equity investments in the US. We're one of the top five largest owners of industrial assets, which is a very important asset class, I know, for insurers as well. Having that expertise, having that exposure to the market is super helpful. We also depend and invest a lot in the data and analytics capabilities that we have at the firm.

[36:08] We're proud of the investment we've made from a resource perspective into those models. We spend a tremendous amount of time there, so partnering that boots on the ground, bottoms up approach, but with an overlay of top-down investment in our data and analytics.

[36:26] We're force ranking the top 400 markets in the US on a quarterly basis to understand which markets we think are going to perform from a rent growth perspective over the next five years. Those types of tools are available to our debt team as we're out executing, building these portfolios and thinking about portfolio construction, and thinking about finding the best loan opportunities in the market.

[36:57] All of those points, the power of the platform is important. If I was looking across out at the landscape of groups to work with, I think having that boots on the ground experience is powerful.

John: [37:12] Abbe, how should insurers be approaching manager selection in this space?

Abbe: [37:17] There we go. I kind of answered that, but it is this combination of having this breadth, scope and ability to um have a larger platform with the resources – scaling, particularly in the US market and being relevant across a borrower's ecosystem. Being able to provide a stabilized loan as a core mortgage or a CML and put out that on the balance sheet of our general account.

[37:53] Being able to provide core-plus value-add lending. Being able to also be relevant for development and construction loans. The breadth of that offering and platform is powerful. I'd also say in a market like today where we have seen some increased competition as liquidity comes back into the market, having differentiated sourcing models is important.

[38:16] We are out in the market. The US real estate debt capital markets are the largest and most liquid in the world. That's the good news in a lot of ways. As the markets stabilize, there is some competition there.

[38:32] Being able to have a differentiated sourcing model where we are working directly with many of the groups that we're lending to, they're groups that we've perhaps partnered with on the equity side perhaps have touch points with across our broader SLC platform. Being able to directly source those opportunities in the market and find really differentiated off-market opportunities is also something that from a manager selection perspective, we think is important.

John: [39:01] Pramit, what advantages does real estate credit offer in terms of asset liability management?

Pramit: [39:10] Great question. Again, now we are pivoting to life insurers because it matters to them. All insurers care, but life insurers are required to provide ALM. One big aspect I want to point out is back to Abbe's point, it's the entire spectrum of core, core-plus mortgages, then value-add, all the way down to construction loans. Now, they all fit in different parts of a life insurance book.

[39:39] If you look at a typical book, which is a long duration life insurance book, you can think of a strategy where you have some longer dated, call it corporate credit investments on the public side, private side. Now on the mid to shorter end, you have a commercial mortgage loan, a core, core-plus, and on the shorter end, have, value-add or construction loans.

[40:05] What that does is a little bit of, call it, liquidity bar billing. You are giving up some liquidity on the shorter end to get access to these higher-yielding downside protected asset classes. On the longer end, when typically liabilities start paying off, your assets are also rolling off, your illiquid assets. Now, there is flexibility on the value-add side, again through some of the structures, to perpetuate that originations.

[40:36] What do I mean by that? Via reinvestment, you can extend, call it the effective duration of that strategy. That gives life insurers more flexibility. Instead of being confined to a couple years, now they can think of a slightly longer dated mid-duration type note like a loan strategy. That's one way. Now, the other thing I talked about, liquidity, I'll mention credit briefly as well.

[41:05] In terms of credit, you don't want to stay locked into, let's say, a construction loan for very long tenure because there could be credit events, there could be natural migration. They are down in terms of the risk spectrum and value-added, somewhere in between as well. It's better if you are on the shorter end versus on the longer end.

[41:31] You are better off having more higher quality liquid, maybe on the public side credit investment. That way, you can manage both liquidity, credit and migration, and they all fit into a broader ALM policy.

John: [41:47] Abbe, which property sectors are generating the most interest from insurance investors right now?

Abbe: [41:56] I spoke a little bit about the expanding opportunity set where we actually see this ability to invest across a more diverse set of real estate asset classes, and that is a trend that we're continuing to see.

[42:10] That being said, the two asset classes where we are most active across our platform both on the equity and debt side, and we see the most appetite from insurers and other clients are in the residential and industrial space.

[42:26] To that end, as I mentioned, we have a very large industrial program both on the equity and debt side, primarily focused on logistics assets where we're very focused on some of the themes you're seeing around power and infrastructure, advanced manufacturing. A little bit of a blend of real assets with real estate and infrastructure connectivity there.

[42:54] Then on the residential side, we just announced a large firm-wide commitment to multifamily, which we're excited about to continue to build out those capabilities, which we have, but augment those. That's an asset class that we know the US is very underhoused. I would say on the multifamily side, we are approaching that with some caution. It's very much market specific.

[43:25] That's where our expertise and boots on the ground allow us to make sure that we're picking the right markets that are going to outperform in the short to medium term and capture those. That's where we most see the focus.

[43:39] I'd say just to add on to that again, there are niche asset classes that continue to become relevant, whether that's more manufacturing, industrial, industrial outdoor storage. We see continued activity in the build-to-rent space, some asset classes that are more niche but have become more relevant over the most recent cycle.

Pramit: [44:07] To quickly add to that, from an insurance standpoint, we have also seen residential related asset class, especially mortgages, are very attractive from a federal home loan bank lending program because that's an easier way for insurance companies to generate profitability by accessing their FHLB program and pledging residential mortgage assets against that program.

[44:37] Most insurers take advantage of that, and I think it's also a big driver behind insurers to consider real estate lending.

John: [44:48] Pramit, how are insurers adjusting their risk tolerance when evaluating commercial real estate exposures?

Pramit: [44:57] I think we touched upon parts of this, and again, Abbe, feel free to chime in. In terms of risk tolerance, as we talked about, usually insurers have been focused on core, core-plus segment of real estate lending.

[45:13] Over the years, especially in a zero-rate regime, which was forever till over the last few years, insurers all of a sudden found themselves that their book yield is lower than the risk free, which is not acceptable. Now they are trying to cautiously explore other asset classes or adjacencies within real estate mortgages, going down the risk spectrum but in a very defensive fashion.

[45:43] Again, back to Abbe's point on value-add lending and how that can support the thesis. That's one big adjustment I've seen in insurance companies, risk offices or investment offices, that they have widened their scope. Another trend is, obviously, the corporate private credit market is much advanced now versus, let's say, the counterpart on the real estate side.

[46:13] The first dibs, if I may call that, was on the private credit side, allocation there. Again, Abbe touched upon this. We have seen some of the issues emerge there. Some of the late cycle signals and technicals, overallocation, fund flows have created, not everything is good anymore, so insurers need to be very selective.

[46:36] Insurers have the choice to be very nitpicky there, spend a lot of time and try to pick the good ones, or they can look on the real estate side where there is a ton of opportunities and not enough technical pressure, fund flows to deploy trillions of dollars. The credit underwriting standards are still intact. It's just that judgment or that expansion in risk horizon that insurers are now considering.

Abbe: [47:04] One point I'd also make just to continue to touch upon value-add lending as well is there's this dynamic for value-add business plans where there's additional value being created across the loan term. We're in a better position and there's more cushion for our loan at the end of the loan term than there is at the beginning.

[47:27] Well, it's maybe not an adjustment of risk tolerance, but I think this appreciation for what value-add lending can provide in terms of the alignment with your borrower, in terms of improving credit metrics across the loan term, is something that we find compelling to many of our clients.

[47:47] Whereas with more stabilized assets, you are a bit more exposed to the more macro volatility because you have a cash flow, you lend on that cash flow, and there can be some volatility in that. This value-add lending where we have that alignment with our borrowers, this ability for additional value to be created at the asset level over the loan term is something that we think is quite compelling as well.

John: [48:11] Abbe, how are insurers evaluating credit quality in today's lending environment?

Abbe: [48:17] The good thing about being a real estate lender my entire career, it's all about the downside. Even in a market like today where we are seeing improving fundamentals, where we do have the capabilities through our data and analytics to see which markets we think are going to perform in the short to medium term, we're not underwriting any of that on the real estate lender side.

[48:41] It's all about where is the market today and how bad could that market get. Our team has a lot of expertise projecting that out because we've been through many cycles today and we've have that expertise. How bad can it get? We're still going to get our principal back on every loan.

[48:56] While there is some execution risk that we're underwriting at the real estate level, from just a downside protection perspective, and our credit culture that we have across -- and I think this is important to have success in this value-add lending type of strategy -- is you have to have a cohesive credit culture across the entire platform. We have 20 billion of real estate debt at BGO globally.

[49:26] It's a big book, but there is a real cohesiveness to how we approach credit, how we approach our risk tolerance, how we underwrite. That serves us as we look across regions. We are executing in Canada, the US, and Europe. We have a very diverse portfolio from a geographic perspective. From the senior level, that cohesiveness and that focus on that downside protection has served us well.

John: [49:56] Pramit, what should insurers be mindful of when managing concentration risk in real estate lending?

Pramit: [50:03] That's a great point. The first thing that comes to mind is diversification across geography. As we say, real estate lending is location, location, location. That's the number one thing. Picking the right markets, right submarkets, again, back to Abbe's point, and building a portfolio across different markets such that any shocks or headwinds you might face in a certain market get absorbed elsewhere.

[50:44] Those could be, you can think of a climate risk event, wildfire, hurricanes. You can think of insurance costs rising. You can think of an economic downturn which affects one part of the country versus another. Having that is a big, again, source of downside protection. The other aspect I'll point out, again, Abbe already talked about this, but diversification across sponsor types.

[51:13] Having different sponsors, having many different names who hold equity on your portfolio rather than just a couple of names, even if they're big ones because things can go wrong with the big guys too. That's another way to think about portfolio diversification, risk management.

[51:37] The last one I'll point out, although this is a little bit nuanced, is property type diversification. There are some very strong teams, again, as Abbe pointed out, on the residential and industrial side. I'm not recommending that insurers go and put money in every single sector out there.

[51:58] That's not the right way to invest your portfolio. Again, pick the right spots within residential, within industrial, and then selectively look into other asset classes, which, again, to Abbe's point, have shown a strong recovery track record.

Abbe: [52:16] I'd also just add to that on the diversification side. We refer to our higher yielding strategies as value added. Arguably, it could be a little bit of a misnomer because there is some diversification in the types of business plans at the real estate level that we're backing as well, where you have some that are more bridge transitional.

[52:37] Almost more core-plus type of portfolio through to the value-add acquisition loans where a group's buying an asset with a heavier value-add business plan through to construction and development where we're particularly at BGO well poised to be constructive because we're out developing a lot of real estate across the country.

[52:57] There is some diversification there in where a borrower is in the business plan that provides some more granular risk diversification within the greater portfolio for the high yield strategies.

John: [53:10] Abbe, did insurers learn any lessons from the recent volatility in the commercial real estate market?

Abbe: [53:18] I don't know what they've learned, but what we've tried to do with our clients, in particular insurance clients, is be as transparent as we can. Be a partner. As I think you introduced, we've got over 750 clients globally. We have over 90 clients within our real estate debt platform. Many of those are groups that have been investing with us for a long period of time.

[53:42] That's not only because of our track record, I think our track record, definitely, that helps, and our performance. It's also because we are transparent. When there are issues, as there will be in a cycle, we're able to identify those quickly, be proactive on the asset management side, and importantly, be communicative with our clients about what we're seeing within the portfolio so there aren't any surprises.

[54:12] Asset management, we didn't really touch on that, but super important that we asset manage all these loans in house. They're high touch. We've got good performance covenants and ability to monitor the progress. There are twists and turns in many of these loans and things that change on the ground.

[54:29] Again, being proactive, being realistic about those, having a team that's had experience going through these types of cycles before, and then most importantly, the ability to be transparent with their clients, I think, has served us well.

Pramit: [54:45] Yeah, I'll have to second that. I think transparency has been a big, big, number one or number two thing for insurance companies because, obviously, on the public markets, there's a lot of transparency, there's a lot of disclosure. On the private market side, insurance companies have struggled to get that amount of disclosures or communication with their managers who are running big parts of their portfolio.

[55:10] One thing I can talk about, for example, valuations, where I've seen a lot of insurance companies struggle. They have seen different marks for the same asset. They hold on their book on other books. Which one is a true representation of the asset? There's a lot of questions being asked.

[55:30] To Abbe's point, having that transparent line of communication with insurers and having more disclosures, more ways to support the insurer through their internal valuation process, through their audit process, with their external stakeholder processes and internal stakeholder processes is extremely important. That, to me, is definitely a lesson learned for insurers over the past few cycles.

John: [55:57] Looking ahead, Abbe, and I'd be curious as to what Pramit has to say about this as well, how do you see the role of private real estate lending evolving within the insurance investment portfolios?

Abbe: [56:09] As I mentioned we are seeing a broadening of the allocation across the risk return spectrum. I think that's happening. It's also becoming a more understood within insured portfolios, particularly on the high yield side, what it can provide to a portfolio. Again, we get a lot of questions of, how do groups approach real estate credit?

[56:35] Do you approach it from the fixed income side, from the private credit side, from the real asset side? It varies within client and insurer, but I think overall, there's this acceptance of real estate credit being able to provide a less correlated downside protected allocation within a portfolio, and we continue to see that growing.

Pramit: [57:03] We talked about this also briefly earlier. Insurance companies are starting to get comfortable with expanding their credit box, looking beyond just core, core-plus real estate lending, and trying to add some specific risk parameters. Think of it as either value-add, illiquidity, or taking some business plan risk, but getting appropriately compensated for that risk.

[57:37] That mentality has permeated, and they have also seen some results. They have seen their book yield improve. They have seen their competitiveness improve over the years as a result of expanding their portfolio construction, including new types of asset classes. I expect that to continue to grow and evolve with market needs.

[57:59] Again, certain asset classes may go out of favor, certain may come in favor, but overall, I see the development is positive for the industry.

John: [58:09] This has been a great discussion today. Before we close things out, I would like each of your closing thoughts on what you think the big takeaway is here today, what you would like registrants to remember about today's discussion. Pramit Mukherjee, why don't we start with you? What's the big takeaway from our discussion today?

Pramit: [58:26] The big takeaway is there is an opportunity set out there for all US insurers and insurers in other jurisdictions like Bermuda, across Life and PNC, maybe slightly more applicable to PNC here, to access a higher yielding real estate debt strategy, basically the value-add debt strategy, and consider the risk implications as well as the return or capital adjusted returns and how that can overall complement the rest of their corporate credit heavy portfolio while improving their book yield and profitability.

John: [59:10] Thank you, Pramit. Abbe Borok, what's today's big takeaway?

Abbe: [59:14] Pramit did a good job on the portfolio construction side. From a market perspective, we're the real estate folks. It is a great entry point into the market. We've seen that correction. We are beginning to see the reset basis story in the market.

[59:30] We're getting to see transaction volume pick up. There continues to be this retrenchment from the banks. All of the themes that I discussed, we're seeing across our portfolio of BGO, which again is quite extensive and our debt portfolio. 2026, 2027 are going to be interesting vintages for real estate credit.

John: [59:50] Thank you, Abbe, and thank you, Pramit, for a great discussion today.

Abbe: [59:54] Thank you, John.

Pramit: [59:55] Thanks.

John: [59:56] We would like to let our viewers know that we will have a full replay of this webinar posted within the next day or so. We'll have a full transcript out within the next week or so. We would like to thank SLC Management and BGO for sponsoring today's webinar. For AM Best, I'm John Weber.

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