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

OLDWICK, N.J.–(BUSINESS WIRE)–AM Best has released newly updated tables of net capital charges associated with a representative sample of mortgage-related transactions from Fannie Mae and Freddie Mac’s credit risk transfer (CRT) programs — Freddie Mac’s Agency Credit Insurance Structure (ACIS) and Fannie Mae’s Credit Insurance Risk Transfer (CIRT). 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.

The net capital charge of CRT transactions is represented as B5_m—mortgage-related net loss and LAE reserves risk—in the net required capital formula that is part of BCAR. It is based on unexpected losses and premiums associated with the transactions and is represented as a fraction of the original exposures. For this Best’s Special Report, “Updated Net Capital Charge Tables for ACIS/CIRT Reinsurance Transactions,” the seventh one on net capital charges, AM Best has selected approximately half the 141 CRT transactions effective through June 2022 to calculate the net capital charges associated with individual layers of the CRT transactions.

According to the report, a handful of transactions remain under trigger events due to failed delinquency tests, despite the sharp drop in the national delinquency rate over the past few months, resulting in no principal being allocated to junior tranches. This will not affect AM Best’s net capital charge calculation, as the calculation assumes stress scenarios with trigger events in place for each transaction.

The report also notes that the ultimate effect of the pandemic on the ACIS/CIRT transactions remains unknown, as some borrowers’ forbearance has not yet ended. Forbearance, loan modifications, and foreclosure moratoriums have slowed the speed at which losses in the pools in these transactions develop. At the very least, forbearance has delayed the realization of losses simply because of the time needed to go through the foreclosure process after the maximum forbearance timeframe expires.

AM Best publishes these net capital charge tables semi-annually, using the most current performance data available from the government-sponsored enterprises’ websites. Future publications of the net capital charges will be dependent on the continued timely availability of data from Fannie Mae and Freddie Mac, among other factors.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=322667.

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.

Contacts

Wai Tang, Ph.D.
Senior Director,
Insurance-Linked Securities
+1 908 439 2200, ext. 5633
wai.tang@ambest.com

David Mautone
Senior Quantitative Specialist,
Insurance-Linked Securities
+1 908 439 2200, ext. 5765
david.mautone@ambest.com

Christopher Sharkey
Manager, Public Relations
+1 908 439 2200, ext. 5159
christopher.sharkey@ambest.com

Jeff Mango
Managing Director, Strategy &
Communications
+1 908 439 2200, ext. 5204
jeffrey.mango@ambest.com