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Life insurers' investments in mortgage loans increased in Q1

The aggregate dollar value of mortgage loans held by U.S. life insurers increased sequentially for the eighth consecutive quarter during the first three months of 2017, and some of that growth came from a commercial real estate property type that has been recently subjected to heightened scrutiny.

At $448.30 billion, net admitted affiliated and unaffiliated mortgage loans constituted nearly 11.2% of the industry's net admitted cash and invested assets as of March 31, according to data compiled June 5 by S&P Global Market Intelligence and subject to change. It marked the first time since the fourth quarter of 2001 that more than 11% of life insurers' cash and invested assets were allocated to mortgages at a quarter's end. U.S. life insurers held $409.33 billion in mortgages as of March 31, 2016.

General-account acquisitions of mortgage loans totaled $18.54 billion during the first quarter, which is seasonally the slowest period for purchases of the kind for the industry, up from $16.95 billion during the three months ended March 31, 2016. The cost of the acquisitions exceeded the aggregate amount insurers received upon disposals of mortgages by $7.84 billion, which represented the 23rd time in the past 25 quarters there had been a positive spread between the two figures.

Among the 20 largest holders of mortgages at the group level, net admitted mortgage loans decreased during the 12 months ended March 31 for only one: Massachusetts Mutual Life Insurance Co. and its subsidiaries. Ten of the 20 groups experienced double-digit percentage growth on a year-over-year basis, led by an increase of 32.2% for AXA Equitable Life Insurance Co. and its U.S. life affiliates. The U.S.-domiciled AXA companies primarily invest in mortgages on office buildings, agricultural properties and apartment complexes, according to AXA Equitable's most recent 10-Q.

Mortgage loans have offered relatively attractive yields to insurance companies in a low-interest-rate environment. The U.S. life industry's gross yield on mortgage loans in 2016 of 4.88% marked a decline of 25 basis points from 2015, but it compared favorably to the gross yield on bonds of 4.65%, excluding affiliated investments. Credit quality has remained strong, with restructured, 90+ days past due, and foreclosed mortgages constituting only 0.5% of the industry's outstanding investments in the asset class at year-end 2016.

A series of Chapter 11 bankruptcy filings by prominent retailers and headlines about major chains engaging in large-scale store closings amid a shift in customer shopping preferences have created some concern about mortgages on retail properties. But life insurers' investments in the property type continued apace during the first quarter.

The aggregate cost of acquisitions of mortgages on retail properties totaled $3.09 billion during the period, up from $2.65 billion for the quarter ended March 31, 2016. Life insurers received aggregate consideration of $1.04 billion in the first quarter on disposals of mortgages on retail properties.

Northwestern Mutual Life Insurance Co.'s $225 million March acquisition of a mortgage on a retail property in Scottsdale, Ariz., with an effective interest rate of 3.95% ranked as the largest single investment of the kind in the industry during the first quarter. Commercial Real Estate Direct reported that the life insurer had originated a loan in that amount on Kierland Commons, an upscale outdoor shopping center in Scottsdale.

Additionally, Pacific Life Insurance Co. in January invested in a mortgage on a Las Vegas retail property with actual cost of $215.3 million and an effective interest rate of 4.22%. The Las Vegas Review-Journal reported that the new owners of the 1.1 million-square-foot Town Square Las Vegas had obtained a mortgage in that approximate amount from Pacific Life.

AXA Equitable had the quarter's fourth-largest acquisition of a mortgage backed by a retail property: a $99.1 million loan on a Chicago property.

Jeffrey Lorenzen, executive vice president and chief investment officer at American Equity Investment Life Holding Co., said his company performs a "deep-dive analysis" regarding acquisitions of retail mortgages. American Equity Investment Life Insurance Co.'s investments in loans of the kind during the first quarter were considerably smaller than the aforementioned transactions as they ranged from $3.3 million for a loan backed by a Sugar Land, Texas, property to $15 million for a loan on a Dallas property.

"We look for stabilized, good-quality and well-located properties in core markets," Lorenzen said during a May conference call, noting that his company performs stress tests to determine how individual properties might perform in a downturn.

"We primarily lend on community strip malls or grocery store-anchored shopping centers," he added. "And we believe exposure to the internet disintermediation is extremely low."