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US life industry investments in mortgage loans rise in challenging interest rate environment

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US life industry investments in mortgage loans rise in challenging interest rate environment

The total dollar value of the U.S. life insurance industry'sinvestments in mortgage loans hit another high in 2015, as companies continued toturn to the asset class in an effort to find yield in a low-for-long interest rateenvironment.

Net admittedmortgage loans held by U.S. life insurers increased 8.3% year over year to $403.89billion as of Dec. 31, 2015, according to data reported on annual statutory filingsas compiled by SNL through April 3. The increase was the largest observed in atleast the past 15 years, exceeding the previous high during that stretch of 7.2%in 2007.

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On arelative basis, unaffiliated mortgage loans increased to 11.3% of gross cash andinvested assets, also excluding affiliated investments, as of Dec. 31, 2015, fromless than 10.7% on the same date in 2014. Not since Dec. 31, 2001, have unaffiliatedmortgage loans accounted for as high of a percentage of gross cash and investedassets at a year's end.

Ten U.S.life groups, as consolidated by SNL, maintained general-account holdings of mortgageloans in excess of $10 billion as of Dec. 31, 2015, led by MetLife Inc.'s $58.07 billion. The groups led by and New York Life Insurance Co.ranked second and third, respectively, on that basis, followed by 's U.S. life companiesand the group led by MassachusettsMutual Life Insurance Co.

Non-insuredcommercial mortgage loans deemed in good standing continued to account for the vastmajority of life insurers' investments in the asset class. According to an aggregationof disclosures made on Schedule B of annual statements, U.S. life insurance companiesheld loans fitting that description with a combined book value of $363.25 billionas of Dec. 31, 2015, up from $338.01 billion on the same date in 2014. Among alltypes of loans, the general accounts of U.S. life insurance companies acquired mortgageswith an actual cost of $95.99 billion in 2015, compared with $74.08 billion in 2014.Additional investments in existing loans totaled $5.47 billion, up from $4.68 billion.

MetLifeled the industry as the general accounts of its U.S. life and annuity companiesadded mortgage loans with aggregate actual cost of $17.26 billion. The largest singleloan acquisition reported by an individual MetLife life and annuity subsidiary onSchedule B, Part 2 of their 2015 annual statements, and the third largest by anysingle U.S.-domiciled life and annuity company, was a $333.1 million Sept. 15, 2015,mortgage with an effective interest rate of 3.48% on a retail property in ShortHills, N.J., with building and land value of $620 million. Pacific Mutual Holding Co.'s Pacific Life Insurance Co. reported the acquisition of a$331 million with the same effective interest rate on a Short Hills retail propertyon Sept. 15, 2015. New York Life and a subsidiary also reported acquisitions ofloans on a Short Hills retail property in the combined amount of $327.7 million.

The companiesdisclosed in September 2015 that they had teamed up to refinance an existing mortgageon The Mall at Short Hills, with MetLife serving as the lead lender on the 12-year,fixed-rate loan. MetLife described the mall as one of the most successful in thecountry.

"Realestate investments, including commercial mortgage loans, are an important part ofMetLife's asset-liability matching program," MetLife said in a . "These long-term investmentsare designed to provide a good match for the long-term liabilities the company writes."

Disclosuresof mortgage loan holdings by publicly traded companies in SEC filings may differfrom those reported in the general-account statutory statements of their U.S.-domiciledlife and annuity subsidiaries.

Withthat disclaimer in mind, MetLife, at the holding-company level, had a recorded investmentof $66.93 billion in commercial, residential and agricultural mortgages as of year-end2015, up from $59.84 billion a year earlier, according to its most recent annualreport on Form 10-K.The company said it seeks to diversify its commercial mortgage holdings, which totaled$44.01 billion as of Dec. 31, 2015, by geography and property type. Its yield onmortgage loans in 2015, inclusive of prepayment fees, declined to 4.97% from 5.15%a year earlier.

Prudential'scommercial and agricultural mortgage portfolio at the holding-company level, excludingits closed block, totaled $39.00 billion as of Dec. 31, 2015, up from $34.88 billiona year earlier, according to its Form10-K. Total mortgages and other loans increased to $40.58 billion from$36.64 billion. Prudential said the weighted-average debt service coverage ratioon its general account investments in commercial and agricultural mortgage loanswas 2.45x; the weighted-average loan-to-value ratio was 57%.

MassMutual,which had mortgage loans increase 13.3% year over year to $23.00 billion at thegroup level as of Dec. 31, 2015, reported an earning yield on its $22.01 billionof mortgage loan holdings on an individual company basis of 4.9%, down from 5.1%in 2014, according to the management's discussion and analysis section of its 2015annual statement. Thecompany said its commercial mortgage portfolio is diversified by geography, maturityand property type.

reported in its 2015MD&A that its mortgage loan holdings of $19.05 billion, which markeda year-over-year increase of 22%, had an overall yield of 4.44%. That compares witha yield of 5.27% on a portfolio valued at $15.61 billion at year-end 2014. TIAA'sgrowth rate ranked highest among the U.S. life insurance groups with the 10 largestmortgage portfolios as of Dec. 31, 2015.

The increasein mortgage holdings by life insurance companies occurred during an especially activeperiod for originations.

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The MortgageBankers Association reported that the fourth quarter of 2015 ranked as the fourth-highestperiod for commercial mortgage originations on record. The organization attributedsharply higher loan production in the industrial and hotel sectors for the heightenedactivity. Origination volume by life insurance companies increased 19% year overyear in the fourth quarter of 2015 and 23% for the full year, according to the MortgageBankers Association.

Propertyand casualty insurers have traditionally allocated well less than 1% of their grossassets to mortgage loans, but they too stepped up their investment activity during2015. At 0.9% of gross unaffiliated assets, the industry's total investments inmortgage loans reached its highest level on a relative basis in the 15 years forwhich SNL has compiled the data point.

AmicaMutual, for one, allocatedapproximately $7.6 million to mortgages in 2015, up from zero in 2014. The companycited an effort to diversify its investment portfolio and to generate alternativestreams of investment income for the strategy. The P&C units of also invested in mortgageloans and to much greater effect. They held mortgage loans valued at $177.9 millionas of Dec. 31, 2015, up from zero a year earlier.

"Thecommercial loan portfolio consists primarily of high quality fixed- and floating-rateloans with terms of 2-10 years, backed by high-quality commercial properties inthe U.S.," the company disclosed in its annual report.

IncludingAmica Mutual and Alleghany, eight U.S. P&C groups or top-tier entities investedsome amount in mortgage loans in 2015 after having zero allocated to the asset classat year-end 2014.