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.

Insurers give up on investing

Allstate Corp. got out of the stock-picking business by hiring Goldman Sachs Group Inc. to manage a $5 billion equity portfolio out of its overall $100 billion investment pool.

and

Deutsche Bank AG and BlackRock are the two biggest money managers for insurers, controlling about $200 billion in insurance assets each...

You know, Goldman and Deutsche and all those other Wall Street shops underwrite the IPOs - who ELSE would know more about them. Let's get the same guys who sell us stuff to decide on what stuff to buy us - better yet, let's pay them to help us choose to buy their products.



In all fairness, Blackrock and most of the other money managers probably make sense, and Hartford, and some of the others listed, really are bad at investing.

NAIC - "We'll just rate our own bonds!"

Risk.net reports: You have to have sympathy with their plight - the US National Association of Insurance Commissioners (NAIC) sat down a long time ago and put restrictions dictating how much an insurance company must keep in reserve based on an investment's rating; a rating determined by NRSROs.

Obviously, in hindsight, and even just with sound investment management practices, no one should make an investment solely based on a rating. Nonetheless, that is how virtually all funds are set up to some extent ("Investment Grade" fund, "AAA" portfolio, you see it over and over).

On the other hand, the new methodology has a little bit of the Fox watching the henhouse feel to it, despite being implemented by PIMCO. They're already using it for RMBS, and they're looking at moving it to CMBS.

In an exclusive interview with Life & Pensions, Kermitt Brooks, first deputy insurance superintendant (sic) for New York State Insurance Department, speaking on behalf of the NAIC, said that after evaluating the performance of its new agency-independent capital requirement regime for residential mortgage-backed securities (RMBSs), the regulators would consider expanding the methodology to other structured securities.

"The NRSROs did a good job on single-name securities like corporate bonds, but not on structured products. Let's see how the new approach with RMBSs works – if it does, we will consider whether we want to expand into other structured products, like CMBSs."

On a side note, hopefully this will hasten the demise of the rating agencies...

p.s.s. another win for PIMCO. After TCW's epic fail this week, customer's who are fleeing TCW will naturally be attracted to PIMCO. Despite outperforming PIMCO time and time again, PIMCO carries much better brand recognition as a fixed income powerhouse.

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.