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Mortgage concentration reaches new record for US life industry

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Mortgage concentration reaches new record for US life industry

The steady post-financial crisis expansion in the U.S. life insurance industry's investment allocation to mortgage loans accelerated in the second quarter as companies continued to turn to the asset class as a relative value play.

Mortgage loan holdings climbed to new highs on absolute and relative bases as of June 30, and the aggregate amount spent by U.S. life insurers on mortgage loan acquisitions set a new high for a second quarter.

Loans on real estate for the U.S. life industry increased to nearly $498.32 billion on an admitted basis as of June 30, representing 12.3% of net admitted cash and invested assets, from $486.57 billion, or 11.8% of cash and invested assets three months prior, according to an S&P Global Market Intelligence analysis of quarterly statement disclosures. The average allocation since the start of 2002 was 10.3%.

U.S. life insurers acquired mortgage loans in their general accounts with an aggregate actual cost of $27.05 billion, based on the Schedule B - Verification pages of quarterly statements, up from $26.72 billion in the second quarter of 2017. The aggregation of the actual cost of loans acquired between April 1 and June 30, according to Schedule B, Part 2 of quarterly statements, amounted to $26.69 billion, an increase of $1.11 billion from the same period in 2017.

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Athene Holding Ltd. Chairman, CEO and Chief Investment Officer James Belardi said during an August conference call that his company opted to invest more than $1 billion over time in residential mortgage loans as an alternative to nonagency residential mortgage-backed securities. Belardi observed that the nonagency RMBS market has been shrinking and the opportunities that remain generally "do not provide sufficient risk-adjusted returns."

At the holding company level, Athene reported holding nearly $1.38 billion in residential mortgages as of June 30, up from $986 million at year-end 2017. Within its U.S. life units, according to S&P Global Market Intelligence calculations, Athene acquired $325.1 million in residential mortgage loans during the second quarter, its second-most active period to date for investments in that asset class.

More broadly, S&P Global Market Intelligence put acquisitions of mortgages by Athene's U.S. life units at $1.44 billion for the second quarter, up from $914.5 million in the year-earlier period. Approximately 27.3% of their second-quarter acquisitions were classified as mezzanine loans as compared with less than 2.5% for the U.S. life industry as a whole.

Athene subsidiaries accounted for three of the U.S. life industry's 30 acquisitions of mortgage loans during the second quarter with actual costs of $100 million or more: a $140 million loan on a San Francisco office property, a $133 million loan on an office property in suburban Washington, D.C., and a $132.7 million loan on a retail property in Yulee, Fla., north of Jacksonville. The latter was one of five loans on retail properties acquired by a U.S. life insurer during the second quarter with actual cost of $100 million or more. The largest of them was TIAA's $203.3 million loan on a Bakersfield, Calif., retail property.

The relative size of U.S. life insurers' investments in loans on retail properties has been declining at a time in which the retail sector has experienced a number of high-profile bankruptcy filings and widespread store closures by financially strapped companies. Loans on retail properties accounted for 12.8% of the U.S. life industry's mortgage acquisitions during the second quarter, down from 13.2% in the year-earlier period. That percentage topped 20% as recently as the fourth quarter of 2015.

Properties classified as office and apartments or multifamily continued to rank as the largest areas of focus for the industry as they accounted for 26.6% and 23.4% of the aggregate dollar amount of U.S. life insurers' second-quarter mortgage acquisitions, respectively.

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Fueled by the combination of investments in commercial mortgages on office buildings and multifamily properties, the general accounts of the U.S. life units of American International Group Inc. led the U.S. life industry during the second quarter with the acquisition of loans with an aggregate actual cost of $2.33 billion.

The U.S. life units of TIAA, MetLife Inc., Global Atlantic Financial Group Ltd. and the group led by New York Life Insurance Co. rounded out the top five on that basis. Athene ranked sixth. Global Atlantic's acquisitions of $1.81 billion marked a year-over-year increase of 479.5% and exceeded the group's combined amount over the previous three quarters.

Revisions by the National Association of Insurance Commissioners to certain factors used to compute risk-based capital levels may provide U.S. life insurers with another reason to increase their investment allocation to mortgage loans.

The NAIC's Capital Adequacy Task Force on June 28 adopted a proposal setting forth new factors to be utilized in calculating authorized control level risk-based capital that reflect the implementation of federal tax reform legislation, which lowered the corporate tax rate to 21% from 35%. It decided not to change the pretax factors applied to mortgage loans for 2018 due to tax reform, but certain revisions could take effect in 2019.

Principal Financial Group Inc. Executive Vice President and CFO Deanna Strable-Soethout, speaking during a Sept. 5 appearance at an investor conference, said that the changes to bond factors "will tend to be a negative" while changes to the mortgage factors "will tend to be a positive." The net effect for her company may be "more neutral than ... some of our peers," she said, given that the company maintains a relatively higher mix of mortgages within its general account.

S&P Global Market Intelligence put the relative concentration of admitted mortgage loans to net admitted cash and invested assets at 18.6% for the U.S. life units of Principal Financial, 6.3 points higher than the U.S. life industry overall. That percentage ranked second behind the U.S. life units of MetLife among the 26 groups with at least $50 billion in net admitted cash and invested assets as of June 30.

It remains to be seen whether others take a similar view of the RBC factors changes and, in turn, consider investing more heavily in mortgages. But the search for relative value, which has traditionally ranked prominently among life insurers' rationale for focusing on the asset class, is likely to remain a driver as long as commercial real estate fundamentals continue to hold up.