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January 05, 2018  

Insurers Resist NAIC-Induced Bond Sales

Defying some industry participants’ forecasts, insurers largely sat on their portfolios of pre-credit-crisis mortgage bonds at yearend.

At issue is a push by the National Association of Insurance Commissioners to assign new loss projections to residential and commercial mortgage securities — and in the process increase the amounts of capital insurers must set aside against some of those holdings.

The expectation was that those companies would respond with a flurry of secondary-market offerings in late 2017, with a focus on pre-crisis securities. But the selling proved minimal, to the disappointment of hedge fund operators and other would-be buyers.

Among the few bid lists that did go out was a small portfolio from an unnamed insurer the week of Dec. 18, likely encompassing bonds with especially large reserve requirements.

Traders, meanwhile, suggested that the buy-and-hold nature of insurers could outweigh their desires to avoid the charges. It also could prove difficult to replace the positions with bonds carrying equivalent returns. “There may be better color next week, but from the looks of it there doesn’t seem to be much of a change,” one trader said.

The NAIC’s revisions stem from massive writedowns that insurers took on their mortgage-bond exposures following the 2007-2008 market crash. At the time, the commission based reserve requirements on rating-agency grades — which, reflecting a rash of downgrades, would have bumped up total set-asides from $2 billion to $14 billion.

The first step, in 2009, was to abandon that approach and begin establishing an internal set of risk measurements. In 2015, the NAIC engaged BlackRock Solutions to oversee the process.

In a possible culmination of the efforts, the NAIC posted new bond-by-bond loss assessments on its website on Dec. 15. Insurers had until Jan. 1 to appeal specific designations, with the results of any challenges expected to start appearing in the coming weeks. The reserve requirements are seen as especially punishing for subordinate bonds.

The NAIC is the standard-setting organization for state insurance regulators.