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

OLDWICK, N.J.--()--As more of Fannie Mae and Freddie Mac’s mortgage risks continue to make their way to the reinsurance market, AM Best has published tables of net capital charges associated with a select group of transactions from these government-sponsored enterprises’ (GSE) 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 Best’s Capital Adequacy Ratio (BCAR) model.

U.S. mortgage insurance exposures, which as a product line had been relatively insignificant for reinsurance companies, today 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)—and as of June 2019, had transferred approximately $22.2 billion of initial limits to the reinsurance market.

The Best’s Special Report, “Net Capital Charges Associated with ACIS/CIRT Reinsurance Transactions,” notes that net capital charge is represented as B5m (Mortgage-related Net Loss and LAE Reserves Risk) in the net required capital formula that is part of the BCAR. AM Best’s determination of a reinsurer’s net capital charge is based on unexpected losses and premiums associated with the GSEs’ CRT programs, and takes into account each reinsurer’s portfolio of ACIS/CIRT transactions. The net capital charges ultimately are aggregated at the portfolio level for each reinsurer to be used in the determination of net required capital in the BCAR. The impact of the total net capital charge on a reinsurer due to its portfolio of GSE CRT transactions varies depending on the diversification of the reinsurer’s business lines as well as the magnitude of its investment risk.

AM Best plans to publish the net capital charge tables semi-annually, using the most current performance data available from the GSEs’ websites. For this report, AM Best has selected approximately half of the ACIS/CIRT transactions effective through June 2019 for publication. 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=287947.

AM Best is a global rating agency and information provider with a unique focus on the insurance industry. Visit www.ambest.com for more information.

Copyright © 2019 by A.M. Best Rating Services, Inc. and/or its affiliates. ALL RIGHTS RESERVED.

Contacts

Emmanuel Modu
Managing Director,
Insurance-Linked Securities
+1 908 439 2200, ext. 5356
emmanuel.modu@ambest.com

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

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

Jim Peavy
Director, Public Relations
+1 908 439 2200, ext. 5644
james.peavy@ambest.com

Contacts

Emmanuel Modu
Managing Director,
Insurance-Linked Securities
+1 908 439 2200, ext. 5356
emmanuel.modu@ambest.com

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

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

Jim Peavy
Director, Public Relations
+1 908 439 2200, ext. 5644
james.peavy@ambest.com