As it relates to our portfolio, I would say that the unrealized losses within non-agency CMBS is really driven by higher benchmark interest rates and some widening of credit spreads on the back of concerns for our commercial real estate. But we do feel good about the exposure. Our duration is 3.1 years out from that asset class, as I mentioned in my prepared comments, 93% of it is AAA and AA-rated. And with those higher tranches, you have a level of subordination. And across our whole non-agency CMBS, we have about a 33% subordination, which provides us quite a bit of protection in terms of losses that might come into the portfolio. The average loan-to-value across the whole non-agency CMBS portfolio is 56%. So, what we would describe as an effective loan to value when you consider the loan to value, plus the subordination is 36%, so pretty far removed from a dollar of loss in terms of true losses.
There’s clearly going to be some aftermarket losses as investors and others have concerns about commercial real estate. But in terms of true defaults in credit losses, we feel pretty good about them. Maybe just a couple of other quick statistics I’ll give you, and we’ve done quite a bit of work on this from a risk management perspective. But we have been stress testing the portfolio. And if you go back to the great financial crisis back in 2008/2009, then go peak to trough in terms of commercial real estate from a property index perspective, which is calibrated to the Green Street Commercial Property index, it was about a 36.7% decrease peak to trough in terms of the value of real estate. So, a pretty healthy decrease. But when you think on a go-forward basis, how much do you think commercial real estate is going to be down by?
When we stress tested our portfolio for non-agency CMBS to get $1 of loss across the portfolio, we have to have a 40% decrease in the value of the real estate. If we had a 50% decrease in the value of the real estate, we’d have about a $9 million loss. So those are just a couple of kind of risk management metrics we’re taking a look at. So, you have to have a worse situation than the great financial crisis in ‘08 and ‘09 from a valuation perspective to have any meaningful actual credit losses. But again, there’s always the mark-to-market impact and asset classes could sell off, and spreads could widen. So, we’re cautious but feel very good from a CRE-loss perspective within non-agency CMBS.
Mike Zaremski: We can take this off-line as a follow-up, is it worth talking about your comment about subordination versus LTV and how you get to the 36 because another one of your peers has been saying something similar, and I feel like there’s some confusion, but we can take it off-line, too.
Mark Wilcox: Yes. But let’s take that offline, we’re getting a little bit into the weeds here. But happy to follow-up with a conversation after the fact.
Mike Zaremski: Thank you.
Operator: Thank you. Our next question comes from Grace Carter with Bank of America. Your line is now open.
Grace Carter: Hi, everyone
John Marchioni: Good morning, Grace.
Grace Carter: I was hoping we could talk a little bit about the components of the combined ratio guide for this year. I think last quarter, you had mentioned a 32.6% expense ratio target and, I think, 0.1% dividend ratio target. So, I was just curious kind of using that 96.5% and backing out the expenses and the catastrophe load as well as the full year impact of reserve development in the quarter. I’m getting, I think, a 59.6% core loss ratio for the year, which is a little bit higher than the 59.3% that you all had mentioned last quarter. So, I was just curious, just trying to square that versus the favorable core loss ratio reported in 1Q 2023? Or if any of the other components have moved around?
