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Search for yield continues to lead insurers to commercial real estate debt

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Search for yield continues to lead insurers to commercial real estate debt

U.S. life and property-and-casualty insurers continued to increase their mortgage loan concentrations on a relative basis during the third quarter even as their pace of new investments tailed off.

Net admitted mortgage loans constituted 11.6% of the U.S. life industry's net admitted cash and invested assets as of Sept. 30, up from 10.8% on the same date in 2016, according to a review of quarterly statutory statement data. P&C insurers have not invested in mortgages to nearly the same extent, but their holdings topped 1% of net admitted cash and invested assets for the first time at a quarter's end in at least the last 16 years.

Mortgage loans tend to be viewed as offering attractive risk-adjusted yields relative to other asset classes during a time in which interest rates remain low. The U.S. life industry's net yield on invested assets increased 1 basis point year over year during the third quarter but remained near historical lows at 4.49%.

U.S. life insurers disclosed general-account acquisitions of mortgage loans with an actual aggregate cost of approximately $20.4 billion in their third-quarter statutory filings, which represented a decline of approximately $3 billion from the year-earlier period. Their overall holdings of net admitted first-lien mortgages increased, however, to $459.8 billion from $453.2 billion at June 30 levels and from $418.3 billion year over year. Mortgage loans other than first liens, which generally includes mezzanine loans, increased to $8.7 billion as of Sept. 30 from $8.2 billion as of June 30 and $7.3 billion as of Sept. 30, 2016.

The U.S. life units of MetLife Inc. led the industry in general-account mortgage loan acquisitions with an aggregate cost of $2.16 billion. The U.S. life groups of TIAA and Massachusetts Mutual Life Insurance Co. also had acquisition volume in excess of $1 billion during the third quarter.

Aggregate mortgage loan acquisitions by the general accounts of the U.S. life units of American International Group Inc., New York Life Insurance Co. and Prudential Financial Inc. all exceeded $1 billion during the second quarter of 2017 and the third quarter of 2016, but fell short of that mark during the three months ended Sept. 30, in a development that may reflect the lumpiness of the quarterly statistics.

Teachers Insurance & Annuity Association's September acquisition of a mortgage with actual cost of $385 million on an industrial property outside of Richmond, Va., represented the largest such purchase by an individual U.S. life entity during the third quarter.

The TIAA company was responsible for five of the 27 mortgage acquisitions by individual life entities valued at $100 million or more during the period. Two of those TIAA loans were labeled as mezzanine loans: a $156.8 million loan on a London office property with an effective interest rate of 6.36% and a $125 million loan on a Cambridge, Mass., office property with an effective interest rate of 5.48%. The effective interest rates on the three first-lien commercial loans ranged between 3.50% and 3.60%.

TIAA and U.S. life units of Athene Holding Ltd. accounted for the vast majority of the $666.7 million in mezzanine loans acquired by U.S. life insurers during the third quarter. But while TIAA's other-than-first-lien loans totaled an industry high of nearly $2.4 billion as of Sept. 30, they represented only 0.9% of the group's net admitted cash and invested assets. For the Athene U.S. life group, loans in that category represented 3.3% of its net admitted cash and invested assets.

As the low-for-long interest rate environment persists, albeit not to the same depths the industry experienced in 2016, insurers continue to enter the mortgage asset class anew. Two U.S. life groups and a stand-alone life entity reported more than $1 million in mortgage holdings as of Sept. 30 as compared with zero on the same date in 2016. Seven U.S. P&C groups or stand-alone entities did the same.

Pacific Investment Management Co. LLC, or PIMCO, recently identified commercial real estate loans of more than $50 million with loan-to-value ratios of between 65% and 80% outside of top-tier markets as among the most attractive opportunities for investment in commercial real estate debt given limited options for borrowers seeking that level of leverage.

S&P Global Market Intelligence and PIMCO will convene a one-hour webinar at 11 a.m. ET on Dec. 7 to examine recent insurance investment trends in commercial real estate debt and additional opportunities for insurers to attain attractive risk-adjusted returns.