Best’s Special Report: AM Best Updates Net Capital Charges Associated With Fannie-Freddie Mortgage Risk Transfers

With more of Fannie Mae and Freddie Mac’s mortgage risks making their way to the reinsurance market, AM Best has updated tables of net capital charges associated with a representative sample of transactions from these government-sponsored enterprises’ (GSEs) credit risk transfer (CRT) programs. These tables also highlight some of the key components of the factor-based method used to calculate net capital charges in the Best’s Capital Adequacy Ratio (BCAR) model. This is the fourth report on net capital charges for a representative sample of CRT transactions.

U.S. mortgage insurance exposures have become pronounced in some reinsurers’ lines of business. The GSEs began transferring mortgage credit risk to the reinsurance market around 2013 through their credit risk transfer programs—Freddie Mac through its Agency Credit Insurance Structure (ACIS) and Fannie Mae through Credit Insurance Risk Transfer (CIRT).

The Best’s Special Report, “Updated Net Capital Charge Tables for ACIS/CIRT Reinsurance Transactions,” notes the net capital charge of CRT transactions is represented as B5m—mortgage-related net loss and LAE reserves risk—in the net required capital formula that is part of Best’s Capital Adequacy Ratio (BCAR). It is based on unexpected losses and premiums associated with the transactions and are represented as a fraction of the original exposures.

The elevated delinquency rates brought on by the COVID-19 pandemic have led to trigger events for the majority of the ACIS/CIRT transactions, resulting in no principal being allocated to junior tranches. However, this will not affect AM Best’s net capital charge calculation as it already assumes stressed scenarios in which trigger events are in place for each transaction. Due to the pandemic, ACIS/CIRT transactions have higher realized losses, which will ultimately erode at least a portion of the first loss layers in the transactions; the losses may also erode the upper layers, depending on the structure of the transaction. AM Best believes that forbearance, loan modifications and foreclosure moratoriums have slowed the speed of realized losses in the pools in these transactions. At the very least, forbearance has delayed the realized losses simply because of the time needed to go through the foreclosure process after the maximum forbearance timeframe expires.

AM Best is publishing the net capital charge tables semi-annually, using the most current performance data available from the GSEs’ websites. For this report, approximately half of the 114 ACIS/CIRT transactions effective through December 2020 have been selected. Future publications of the net capital charges will be dependent on the continued timely availability of the ACIS/CIRT data from the GSEs, among other factors.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=305475.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in New York, London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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