BOSTON—Returns on commercial mortgage loans held by life insurance companies made a strong recovery in the third quarter of 2015, LifeComps said Friday. The LifeComps Commercial Mortgage Loan Index posted a 1.62% total return in Q3, rebounding from Q2′s negative 1.23% performance. The LifeComps index currently encompasses 4,500 loans with an aggregate principal balance of $103.7 billion.
Income return across the index was 1.21%, while price added 0.41% during Q3. LifeComps says the value increase resulted from lower yields on Treasuries with terms over two years, which more than compensated for the negative effect of wider mortgage spreads. The yield on the 10-year Treasury declined 29 basis points during the quarter.
The 12-month total return rose to 4.23% from 3.28% in Q2. Annual income of 4.98% was offset by a price loss of 0.75%, due to wider credit spreads that drove values down despite lower yields on longer term Treasuries. The 10-year Treasury yield ended the period 46 bps lower on a year-over-year basis.
Of the four major property types, office performed best over the quarter and year with total returns of 1.80% and 4.47%, respectively. Next was retail with returns of 1.70% and 4.01%, respectively, followed by apartments (1.64% and 4.10%) and industrial (1.14% and 3.96%).
Compiled on a quarterly basis since 1996, the LifeComps Commercial Mortgage Loan Index is said to be the only published benchmark for the private commercial mortgage market based on actual mortgage loan cash flow and performance data. The weighted average duration of the loans is 5.2 years and average reported loan-to-value is 50% as of Q3 ‘15. Participating insurers include Allstate Life Insurance Co., CIGNA Investment Management, AXA Equitable, John Hancock, Northwestern Mutual, Principal Financial, Prudential Insurance Co. of America and TIAA.
The improving returns metrics for life companies’ commercial mortgage holdings dovetail with the results of the latest Portfolio Lender Survey of insurance company investment performance conducted by the CRE Finance Council and Trepp LLC, announced earlier this week. CREFC and Trepp say insurance companies, including life companies as well as those in other sectors, experienced lower losses and continue to perform better than CMBS and commercial banks.
The total realized net losses in the general accounts and subsidiary entities of the CREFC/Trepp survey participants were recorded at 0.03% as of Q2 of last year, representing a slight drop from a year ago, when losses were measured at 0.04%. In comparison, CMBS and commercial banks experienced losses of 0.41% and 0.06%, respectively, during the same time period.