BlackRock Tapped to Judge CMBS Risk

NEW YORK CITY-BlackRock has been selected in an RFP process to help evaluate potential losses from about 7,500 CMBS holdings in the portfolios of US insurance companies as of year-end 2010. The National Association of Insurance Commissioners, representing 50 states and five US territories, made the announcement late Thursday. A spokesman for BlackRock tells GlobeSt.com the firm does not comment on client activity.

BlackRock’s solutions unit will coordinate with the Washington, DC-based NAIC to develop expected losses for each CMBS CUSIP, thus allowing insurers to map their CMBS holdings to the appropriate risk-based capital designation and accompanying solvency requirements, the association says. The NAIC used a similar RFP process in selecting Pacific Investment Management Co. this past November to evaluate more than 18,000 RMBS in insurers’ holdings as of year-end 2009.

“The RMBS assessment process was a very important and successful step in our analysis of expected losses and related risk-based capital requirements for the insurance industry in 2009,” Jane L. Cline, NAIC president and West Virginia insurance commissioner, says in a statement. “Expanding this examination to CMBS holdings further enhances our analysis for another 43% of the structured securities owned by the insurance industry. These assessments continue to distinguish and supplement the stringent capital requirements of NAIC and state insurance regulators, which are based upon the expected losses and RBC for a particular company.”

A total of 16 bids were received by the NAIC’s Securities Valuation Office, based in New York, in response to a July RFP. The association and consulting firm Oliver Wyman picked BlackRock on the basis of sound methodology and experience with commercial mortgage securities, ability to process a significant amount of data, policies and procedures in place to avoid potential conflicts of interest and a cost-effective price.

When the RFP was issued in July, Cline commented, “Nearly three years after the onset of the financial crisis, the US insurance industry continues to remain strong compared to the rest of the financial sector. State regulators believe that adding this tool will improve our view of structured securities and our industry.”

It’s a view that in prior years would have relied heavily on the evaluations of ratings agencies. However, the high ratings given by agencies to mortgage bonds during the market’s peak—some $2 trillion worth between 2005 and 2007, according to the Wall Street Journal—has given way to waves of downgrades. Over the past two years, the major agencies have had to lower their ratings on billions of dollars of both CMBS and RMBS as both residential and commercial fundamentals have ebbed.

This gap between the earlier high ratings and the bonds’ subsequent fall from grace has led both to criticism and to the agencies making major changes in the ways that they evaluate the securities. Moreover, the NAIC says its designations are produced strictly for the use of its members and, unlike agencies’ ratings, are “not produced to aid the investment decision-making process.”

Up next, the NAIC will concentrate on the development of macro-economic assumptions with which Blackrock Solutions and PIMCO develop their models. The association says it will schedule public meetings to discuss these assumptions and other issues important to the designation process.