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BlackRock Up for Role Rating Risk At Insurers

Source: Dow Jones Wire

Posted on 08 Oct 2009

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BlackRock Inc., which scored multiple government assignments during the financial crisis, is a contender for another prestigious gig: helping state regulators size up risks in insurers' investments.

The money manager and risk-advisory outfit is among a handful of firms that have talked with officials from the National Association of Insurance Commissioners lately about possibly taking on a slice of work now done by the major ratings firms, according to regulators and an official at the NAIC.

A switch away from the raters -- which a key group of regulators is expected to vote on next week -- would mark yet another power shift on Wall Street in the wake of last fall's market swoon, as regulators and others continue to pinpoint culprits even as times have improved.

The NAIC work entails analyzing risk in bonds backed by residential mortgages that insurers own. The NAIC this year grew disappointed with the ratings agencies after their rapid downgrades of once triple-A-rated mortgage bonds left many insurers holding large amounts of "junk."

Regulators have relied on ratings agencies to determine how much capital insurers need to hold to back up their bonds. They maintain that, by seeking a new method, they are looking not for inflated valuations but for a more reliable process. At NAIC hearings last month, investment pros and even the ratings firms said insurance regulators shouldn't rely on the residential-mortgage-bond ratings as heavily as they do.

Though a price-tag for the assignment hasn't been set, regulators said, the work would be high-profile. Insurers are one of the nation's biggest buyers of bonds, holding nearly $3 trillion. They own more than 18,000 different residential-mortgage bonds, totaling more than $366 billion, according to industry figures.

In addition to BlackRock, the insurance regulators also recently have talked to Pimco Advisory, part of Newport Beach, Calif., bond-powerhouse Pacific Investment Management Co., a unit of Allianz SE; Promontory Financial Group, a Washington, D.C., firm founded and headed by Eugene Ludwig, a former U.S. comptroller of the currency; and Andrew Davidson & Co., a 17-year-old New York firm that also has a specialty in evaluating complex structured securities, according to the regulators.

Pimco and Promontory didn't comment; Andrew Davidson confirmed discussions with the NAIC.

Under the proposal being considered, the NAIC would arrange the contract and work with the analytical firm. Any firm large enough to handle the job could seek it, with insurers paying fees to the NAIC to cover the cost. The proposal, expected to pass, comes from trade group American Council of Life Insurers.

The contract would cover work through Dec. 31, providing regulators with data for use in insurers' 2009 financial statements, said Chris Evangel, a senior executive at the NAIC. Regulators would vote later on a plan to address analysis of those holdings in future years, he said.

BlackRock and the other three firms have "represented that they could meet" a deadline of later this year for estimating losses in insurers' residential-mortgage bonds, Mr. Evangel said. Those estimates would then become the basis for backup capital amounts.

BlackRock's expertise in the bond world last year won it jobs helping the government assess complex securities at collapsed Bear Stearns, nearly collapsed American International Group Inc., and mortgage giants Fannie Mae and Freddie Mac. It also is one of the fund managers in the Treasury's Public Private Investment Program.

Indeed, BlackRock has taken on so many roles that critics have cited potential conflicts of interest. A BlackRock spokeswoman said Wednesday: "We have very strict policies and procedures in place to protect confidential client information and manage any potential conflict of interest," and have two decades of experience in dealing with such matters.

The NAIC's Mr. Evangel said any contracting process would require disclosures of potential conflicts of interest and processes to deal with them.

Insurers have complained to their regulators that the ratings downgrades overstate the problems in many of their bonds, because they don't distinguish the size of the possible loss. They hope that by hiring an analytical firm to estimate potential losses, their year-end backup-capital bill will shrink.

Some consumer advocates have protested that the proposal amounts to insurers' cherry picking valuation methods to hold down capital requirements. The Center for Economic Justice has said the regulators should do their own valuation work.

Regulators maintain that isn't practical in the short-term, because of the huge cost of ramping up the NAIC's valuation office.

Kermitt Brooks, first deputy insurance superintendent in New York, which heads the task force reviewing the trade-group proposal, said the ACLI proposal isn't "a capital-relief initiative," but "a way to accurately analyze the true risk profile of the securities." If the approach wins regulatory approval, he anticipates that "it will lower the capital charges in some instances, and in some cases, it will not."