As U.S. life insurer acquisitions of mortgage loans fell to their lowest level in a third quarter since 2020, the industry's relative emphasis on direct investments in residential loans continued to rise.

An S&P Global Market Intelligence analysis of the Schedule B - Verification pages of quarterly and annual statutory statements finds that U.S. life insurers acquired mortgage loans with an actual cost of $28.94 billion in the aggregate during the third quarter, down from $40.99 billion in the second quarter and $34.64 billion in the year-earlier period. They acquired only $13.56 billion in mortgage loans during the third quarter of 2020 as origination activity stalled amid COVID-19-related uncertainty.

Our review of loan-level disclosures reveals that the industry took a significant step back in its acquisition of uninsured commercial mortgages, with the third quarter's $19.99 billion tally representing sequential and year-over-year declines of 33.6% and 21.4%, respectively. Acquisitions of uninsured loans backed by multifamily properties, which had become the industry's leading area of focus in the asset class, declined at even faster rates.

For uninsured residential mortgages, acquisitions rose 2.4% year over year to $6.01 billion in the third quarter, though that level of activity was down 15.3% sequentially. Those acquisitions accounted for 22.1% of the mortgage loans acquired by U.S. life insurers during the third quarter, the highest share of purchases in the more than seven years covered by our analysis exceeding the previous peak of 20.1% in the first quarter.

One of the market participants that has significantly increased its presence in the residential market provided an upbeat outlook for future investments despite the headwinds in the asset class associated with sharply higher interest rates. This sentiment lends weight to the notion that residential mortgages will continue to play a meaningful role in the industry's overall approach to portfolio allocation.

The decline in commercial mortgage acquisitions was not a phenomenon unique to the life industry. The Mortgage Bankers Association of America's Commercial/Multifamily Mortgage Bankers Originations Index found a 13% year-over-year decline in production volume across investor and property types during the third quarter amid rising interest rates, market volatility and heightened concerns about an impending macroeconomic downtown. The decline pertaining to insurance companies was particularly steep at 45%. Life insurer mortgage acquisitions and the Mortgage Bankers Association survey results tend to be directionally similar, though as was the case in the third quarter not directly comparable.

Though Federal Reserve policy may have stifled supply, the loans that the industry did add during the third quarter generally carried materially higher rates compared with prior periods. The weighted average effective interest rate associated with the industry's third-quarter 2022 acquisitions was 5.09%, which represented increases of 97 basis points from the second quarter and 171 basis points from the year-earlier period.

Each of the life industry's four most active acquirers of mortgage loans in the third quarter of 2021, the U.S. units of KKR & Co. Inc.'s Global Atlantic Financial Group Ltd., the group led by The Northwestern Mutual Life Insurance Co., and the U.S. units of Apollo Global Management Inc.'s Athene Holding Ltd. and MetLife, Inc., experienced declines in acquisitions in excess of 30%.

At the other extreme, several life insurers showed double-digit growth. The group led by New York Life Insurance Co. and the U.S. life units of Tokio Marine Holdings Inc. each grew mortgage acquisitions by more than 50%. American Equity Investment Life Holding Co. more than doubled its acquisitions on a year-over-year basis. During the trailing-12-month period ended Sept. 30, the group's total mortgage acquisitions of $4.52 billion exceeded its activity in the previous 18 quarters combined.

Its activity during recent periods has been heavily concentrated in the single- and multifamily residential space. American Equity ranked third in the industry at the group level based on the aggregate dollar value of its third-quarter 2022 uninsured residential mortgage acquisitions, trailing only the group led by Massachusetts Mutual Life Insurance Co. and the U.S. life units of Global Atlantic Financial Group LLC.

President and CEO Anant Bhalla, speaking during a Dec. 7 investor presentation, said the company entered the residential space in early 2020 and has built its presence since then in partnership with Pretium Partners LLC, a specialized investment manager focused on real estate, mortgage finance and corporate debt. The firm owns and operates single-family rental homes and purchased non-qualified-mortgage originator Deephaven Mortgage LLC and fix-and-flip lender Anchor Loans Inc.

Bhalla said he sees the residential market as "a structural opportunity going forward." His company's third-quarter residential mortgage acquisitions were individually valued at up to $5 million.

In certain cases, the U.S. life industry's residential mortgage investments have been fueled by acquisitions of large pools of loans. That was the case again in the third quarter as Global Atlantic's Forethought Life Insurance Co. and Commonwealth Annuity & Life Insurance Co. acquired $254.4 million and $128.1 million, respectively, in various residential mortgages. MassMutual added residential loan pools with actual costs of $183.7 million and $137.5 million.

The largest individual loans acquired during the third quarter across property types were a $344.6 million Pacific Life Insurance Co. mortgage to refinance a high-rise apartment building in San Jose, Calif., and loans backed by industrial properties in Obetz, Ohio, and Everett, Wash., by New York Life and an affiliate in the amounts of $228.2 million and $228.1 million, respectively. Industrial properties, which commonly include warehouse complexes and manufacturing facilities, accounted for 26.7% of the dollar amount of mortgages acquired by life insurers during the third quarter.

Mortgage loans accounted for 13.3% of U.S. life industry net admitted cash and invested assets as of Sept. 30, down slightly from the two-decade June 30 peak.

The Mortgage Bankers Association sounded a pessimistic tone about the near-term outlook for supply as Jamie Woodwell, head of commercial real estate research, said upon the release of the organization's originations index that the third quarter is "the first of what may be many quarters of depressed borrowing and lending activity." Credit quality will also increasingly come into focus should economic challenges continue to mount.

To date, life insurer mortgage credit quality as reported on the general interrogatories of quarterly statements has held up, but the reporting form only breakout late-stage delinquencies and loans in the process of foreclosure. By dollar value, nearly 99.4% of the industry's mortgage holdings remained in good standing and 99.7% of loans were in good standing when including those with restructured terms.

Methodology note

Loan-level data reflect disclosures on Schedule B, Part 2 of quarterly statements. Acquisitions by property type for the third quarter are not available on a loan-level basis for Prudential Insurance Co. of America. Overall statistics for the third quarter reflect disclosures on the statutory balance sheets and Schedule B of U.S. life insurers' quarterly statements, including those for the Prudential Financial Inc. subsidiary.