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Insurers Brace For Commercial Mortgage Turmoil

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The top 25 U.S. life insurers held about $116 billion in commercial mortgage-backed securities in 2007, and those securities accounted for 3.9% of the insurers’ $3 trillion in 2007 total net admitted assets.

Financial filings show that 6 of the top 25 companies had less than 2% of their assets in CMBS in 2007, and that the two carriers with the most CMBS exposure had 7% to 11% of their assets in CMBS.

National Underwriter compiled those figures by analyzing CMBS from Highline Data, a unit of Summit Business Media L.L.C., New York, the parent of National Underwriter Life & Health.

Highline Data gets its figures from insurer financial statements collected by the National Association of Insurance Commissioners, Kansas City, Mo.

The totals reflect the holdings of the insurers themselves, and not the holdings of asset management affiliates or other affiliates.

Analysts are paying closer attention to financial services companies’ CMBS holdings because of reports of growing weakness in the commercial real estate market.

CB Richard Ellis Group Inc., New York, says the national office vacancy rate increased to 14.7% in the fourth quarter of 2008, from 12.8% in the fourth quarter of 2007.

The International Council of Shopping Centers, New York, reported Thursday that there were 150,000 store closings in 2008 and that a similar number of stores is likely to close this year.

The commercial real estate market depends largely on available credit, and, currently, “we are upon the worst of times” with “extremely tight standards to borrow,” according to Michael Niemira, the council’s chief economist.

The market lost about $250 billion in funding capacity between 2007 and 2008, Niemira reported.

The effects of any downturn in the commercial real estate and commercial mortgage markets will depend on the types and ratings of the securities held in the CMBS portfolios, according to Doug Meyer, a managing director with Fitch Ratings, Chicago.

The overall outlook for the U.S. CMBS market is relatively stable for 2009, although some components of the market, such as collateralized debt obligations and commercial real estate CDOs, could run into turbulence.

Most of U.S. life insurers’ CMBS holdings are in “tranches,” or slices, rated A or higher, Meyer notes.

The top 25 insurers reported that $63 billion of their CMBS holdings were in defined securities and $52 billion were in “other multi-class” securities.

Defined multi-class residential mortgage-backed securities are those securities that are first liens and are rated in one of the two highest categories, such as AAA or AA, by a Nationally Recognized Statistical Rating Organization that is recognized by the Securities Valuation Office, New York, an arm of the National Association of Insurance Commissioners, Kansas City, Mo.

“Other multi-class residential mortgage-backed securities” are those securities that are not first liens or, if secured by first liens, are rated below AA.