If you can't spot the sucker in the first half hour at the table, then you ARE the sucker.

From Bloomberg:

Hartford Financial Services Group Inc. Chief Investment Officer Gregory McGreevey, who slashed commercial-property holdings during the market slump, is betting on a rebound by expanding the insurer’s real-estate financing.
“The real-estate market in total has likely bottomed in terms of its price declines,” McGreevey said of commercial property in an interview at Bloomberg headquarters in New York yesterday. “Most of our opportunities are in direct whole-loan investments where we can find good properties at attractive prices.”

So, just to be clear, we sold CMBS bonds to these jokers at the peak - the worst of the worst. If it was a bunch of small balance dentists' offices with their lake house as part of the collateral, The Hartford ate it up. Then they sold at the trough, again, to me, just in a different chair. Now, once prices have recovered (but many think the sector still has a way to go), they're getting long again.

I'm actually going to stop talking and put together a BWIC of overpriced AJs to send their way right now...

Hartford Takeover Rumors...

Defaults to increase in 3rd quarter

Housingwire reports

Analysts at Deutsche Bank found that the number of new transfers into special servicing will continue to outpace commercial loan workouts. But once properties are ready for liquidation, valuations on commercial real estate are missing the mark, according to Deutsche Bank. More recent appraisals are needed on these properties to narrow the gap between liquidation expenses and proceeds.

The analysts projected an 18% delinquency rate on CMBS.

There we have it - a realistic delinquency rate - 18%. I believe that number.

If you've been watching the MSM, the WSJ, CNN, Fortune etc. all had articles over the last couple of weeks talking about the "accidental recovery in CMBS", and shiny unicorns that shit rainbows that taste like skittles, etc. etc.

I almost sold all CMBS just based on the CNN article alone - they highlight Hartford for pete's sake. You see something that rosy, written by someone who obviously knows little about the world in general and less about CMBS, highlighting "good" companies that were really the "bad" ones - well, you just have to interpret the opposite of how they intend to get anywhere close to reality.

Hartford "takes profits" on CMBS holdings...

Hartford, well known within the CMBS for chasing yield to the bottom of the barrel hoovering up any "AA" or "AAA" rated small balance deals (LASL, HCC, etc.), mezz loan deals (MEZZ), and carefully selecting only the worst AJ bonds available at the peak of the market, began to unload assets last quarter according to Bloomberg today.

To their credit, now does seem like a good time to sell, but I doubt most of those are profitable overall.

McGee cut Hartford’s investments in commercial mortgage-backed securities to 11.5 percent of fixed-maturity assets as of March 31 from 13.1 percent six months before.

CMBS makes up an average of 6% of your typical insurance company portfolio.

Insurer's CRE Exposure

Fitch (sorry no link) noted that:

...Despite a declining outlook for all US CMBS property types and an escalation of losses, the U.S. life insurance sector should be able to manage its exposure to commercial real estate-related losses...

While most life insurers have yet to recognize material losses on their commercial real estate-related investments, a sizeable portion of their assets are entrenched in commercial real estate. And with an increasingly negative outlook in the cards for CMBS over the next couple of years, performance pressure on life insurers is likely to increase over time.

'Commercial real estate (CRE) fundamentals are softening as rents are declining and vacancies increasing in response to the broader economic downturn,' said Managing Director Bob Vrchota of Fitch's CMBS ratings group. 'Without a recovery for commercial real estate fundamentals, recent vintage U.S. CMBS could experience losses averaging 8.7%.'


Some insurers are better off than others. Take Hartford, for instance - not to single any particular firm out, but they had 33% of their structured products portfolio in securities rated lower than AAA at issuance. Virtually all of that has been downgraded to something lower than A-rated today, and thus their RBC ratios have to be shooting through the roof. In addition, about 70% of their structured products portfolio was 2005 vintage or later, i.e. weaker underwriting. According to a 10/24/08 report from Citi, Hartford and XL had the largest CMBS investments of all the Insurers they covered, Hartford had the lowest quality CMBS portfolio (followed by Progressive and AIG), Hartford and Progressive had the highest concentration of IOs, Hartford had the largest CRE CDO exposure (12.3% of shareholder's equity at the time, and 13.1% of their CMBS portfolio) and 11% of them were rated below BBB at the time.

The last stament in the Fitch report that CMBS could experience losses averaging 8.7% seems a little rosy - that is closer to the low-end estimate of average losses in my opinion, and is in line with the average losses experienced during the late 80s/early 90s on senior CRE mortgages. The good news is that most insurers were relatively conservative investors, and further they tended to be CRE guys first, and bond guys second. So, overall I wouldn't expect to see horrible losses in their CMBS portfolios over the long-term.