If the law providing federal supports for catastrophic terrorism losses by insurers expires, Fitch Ratings said it would probably give negative ratings to securities instruments backed by commercial mortgages as it did in 2002.
The New York-based firm gave that outlook in discussing its possible actions if Congress is unable to renew the Terrorism Risk Insurance Act before it expires on Dec. 31.
Fitch said if that happens, it “would expect to take similar rating actions as it did in 2002, when coverage for terrorist acts was not widely available.”
At the time, Fitch placed 29 classes of commercial mortgage backed securities (CMBS) involving 13 transactions on Rating Watch Negative.
The firm said it indicated then that if terrorism coverage was not provided for the properties, “we would view the underlying assets, and the bonds issued based on them, as riskier” and no longer as creditworthy as their then current rating indicated.
Generally, Fitch explained, these were transactions that had a single property, or several properties owned by a single borrower.
Fitch said that ultimately, after TRIA was enacted, all but one of these transactions obtained insurance and the ratings were affirmed.
Since 2002, Fitch noted, volume in the CMBS market has expanded greatly such that Fitch would likely need to take more negative rating actions across its CMBS portfolio of approximately $450 billion of CMBS bonds.
In addition, Fitch said if the lack of terrorism insurance was to make loans more difficult to obtain, and a large number of maturing loans were not able to be refinanced, CMBS multiborrower transactions could also come under review for downgrade.
The company noted that many insurance industry experts contend that a private insurance market has not developed as insurers do not have enough data to reliably estimate the magnitude of a loss due to a terrorist act.
TRIA requires all insurance companies to offer terrorism coverage as part of casualty policies, effectively providing a federal backstop limiting insurance company exposure to casualty from a terrorist event, a protection, Fitch said is otherwise unavailable in the private market.
Insurance coverage for terrorism is important, Fitch said, because it helps facilitate the flow of debt capital to the real estate industry.
If TRIA is not renewed, Fitch said it believes the market availability of terrorism insurance would be limited.