"There will be more losses in these securities going forward," said Michael Moriarty, the New York Insurance Department's deputy superintendent of property and capital markets in a Thursday interview. "With unemployment at 10%-plus, there is less need for commercial real estate, and some of that has not gone through the system yet."
The National Association of Insurance Commissioners (NAIC) said earlier this week that it will re-examine their requirements for the amount of risk-based capital insurers will need to hold against residential mortgage-backed securities at the end of 2009, a move which is expected to result in insurers holding less capital against some of their RMBS holdings. The NAIC said it will continue the process in 2010, and Moriarty said that commercial mortgage-backed securities will get the same type of examination.
One reason for focusing first on securities backed by home mortgages rather than commercial mortgages is that the housing market deteriorated far more quickly, and that insurers tended to hold more home mortgage-backed securities in their investments. Commercial real estate was seen as a lagging indicator, with losses coming after the housing market faltered. But now that worries are growing over commercial losses, those securities are getting a closer look.
Insurers generally hold less CMBS in their investments than RMBS, but life insurers in particular are exposed to commercial real estate through direct mortgages they write as well, which Moriarty said was another concern, particularly for insurers with large mortgages outstanding.
"We are concerned that a precipitous drop in commercial real estate could impact some life insurers," he said.
Losses in CMBS and mortgages could have a big impact on profitability, though not to insurer solvency, which is a regulator's biggest concern, he said. "For it to threaten solvency, we would need to hit a bottom far below what could be projected," he said.