Insurance Regulators Seek CMBS Rater After Hiring Pimco for Home Mortgages

Insurance regulators are seeking a firm to review commercial mortgage-backed securities after hiring Pacific Investment Management Co. to assess the industry’s home-loan investments.

State insurance commissioners, in search of an alternative to rating firms Moody’s Investors Service and Standard & Poor’s, could pick an evaluator by Sept. 3 to review investment losses that carriers might suffer on about 7,500 commercial mortgage- backed securities. The analysis will help determine how much capital insurers must hold to reserve against losses.

The move “makes a lot of sense,” said Scott Buchta, head of investment strategy at New York-based Braver Stern Securities LLC, in an e-mail. Because insurers are expected to hold extra capital against downgraded bonds, using an outside firm to evaluate the risk will lead to “less forced selling by insurance companies based on ratings downgrades” and more purchases of commercial mortgage bonds that have experienced lower ratings.

After ratings firms lowered their assessment of the soundness of residential mortgage-backed securities last year, causing capital requirements to surge fivefold, insurers asked regulators to take a new approach for evaluating the risk.

Capital Relief

The industry got $7 billion in capital relief from regulators after applying Pimco’s forecasting to 2009 financial statements. In March, regulators were asked to use the strategy for bonds backed by mortgages on office buildings, shopping malls, warehouses and other commercial sites.

“State regulators believe that adding this tool will improve our view of structured securities and our industry, the financial sector,” said Jane L. Cline, National Association of Insurance Commissioners president and West Virginia insurance commissioner, in the association’s statement.

Pimco, the Newport Beach, California-based manager of the world’s largest bond fund, was chosen from among 11 vendors by the association in November to help evaluate more than 21,000 residential mortgage-backed securities. Pimco, with more than $1 trillion of managed assets at the end of September, works with financial firms and government entities to evaluate bond and mortgage portfolios.

Regulators are looking for a nationally recognized firm with at least five years of experience in modeling commercial mortgage bonds, which can finish the task by early December.

Pimco spokesman Mark Porterfield did not immediately return a call for comment. Melissa Garville, a spokeswoman at Blackrock Inc., the world’s biggest asset manager, had no comment.

To contact the reporter on this story: Sarah Frier in New York at sfrier@bloomberg.net

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