Last Monday the National Association of Insurance Commissioners (NAIC) published the responses to questions from its Oct 28 RMBS/CMBS conference call.  

During this call, the NAIC was asked questions regarding the CMBS loss modeling that BlackRock Solutions (BRS) has constructed to help determine the amount of risk-based capital that insurance firms need to hold against their CMBS exposure.

According to Bank of America Merrill Lynch analysts, the aspect of the report that is getting the most attention is a table featuring the base case average cumulative defaults for the deals underlying each CMBX index.

BofA Merrill analysts said that BlackRock's estimates are fairly close to, although a tad lower, than their own estimates. The analysts' estimates are higher on the later vintage series, particularly for the average loss in CMBX5.

The market has rallied, analysts said, as a result of the release of BlackRock's estimates. For instance, analysts said CMBX AM and AJ tranches are mostly up 1 to 1 1/2 points while CMBX 5 tranches up two points.

They said that even though the loss estimates are not surprising, they think that part of the rally is the result of the concern that NAIC-modeled loss estimates were previously unknown. The risk, BofA Merrill researchers said, was these projections could have been much higher. Having the loss estimates in this range lessens the probability that insurance firms will be pushed to sell AJs and AMs because of higher risk-based capital requirements.

Meanwhile, JPMorgan Securities analysts said that even though their cumulative loss expectations are a tad less compared with those from BlackRock, they think that the absolute level of BlackRock's expectations to be bullish for the market. This is because BlackRock's estimates seem to be below the level of cumulative losses that many investors believe might still happen.

JPMorgan researchers concluded that some of the risk-based capital insurance firms hold against their CMBS exposure based on the bonds’ current ratings will probably be released. Although the capital might not be utilized for further CMBS purchases, they will probably deploy it. This, in turn, could further exacerbate the market’s supply/demand technicals.

But, they added that these cumulative loss estimates offer further support for the case that cumulative losses are probably less than many investors still fear. Given the attach/detach point of the various CMBX tranches compared with both JPMorgan’s and BRS’ expectations, this supports the notion that double-A and single-A mezzanine tranches should rally, depending on vintage, analysts said. Additionally, they said that the 'AAA'/'AJ' and 'AAA'/'AA' curves should also flatten.

To view the full NAIC report, please click on this link.


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