AM Best has 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 (CRT). 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 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. For this report, the fifth one on net capital charges, AM Best has selected approximately half the 120 CRT transactions effective through June 2021 to calculate the net capital charges associated with individual layers of the CRT transactions.
These CRT ACIS/CIRT transactions are having higher realized losses due to the pandemic, according to the report. Ultimately, this will 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. 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. The forbearance period continues through the next few months, so any certainty about ultimate losses is unlikely until 2022.
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=311155.
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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