Best’s Special Report: Higher Demand for FHLB Borrowing Capacity Likely Amid COVID-19-Fueled Economic Downturn

OLDWICK, N.J.--(BUSINESS WIRE)--As the COVID-19-led economic turmoil continues to grow in the United States, insurers are positioning themselves for more borrowing to help offset potential liquidity pressures, and may look to tap the Federal Home Loan Bank (FHLB) for relief, according to a new AM Best special report.

The Best’s Special Report, titled “Potential Rise in Demand for FHLB Borrowing Capacity,” states that the number of FHLB insurance company members grew by more than 8% in 2019 to 471. Life/annuity (L/A) insurers are the most-active segment, although just 22% have borrowing access. At more than $80 billion, the segment also accounts for more than 90% of the insurance industry’s borrowing. While L/A insurers have been more likely to tap FHLB capacity mainly to help mitigate spread compression in the prolonged low interest rate environment, more of the heightened activity over the last few weeks can be characterized as liquidity trades rather than opportunistic. Funding agreements accounted for almost 75% of borrowings in 2015, rising steadily to 82% at year-end 2019 for L/A insurers. For the property/casualty and health segments, more than 95% of borrowings have been in the form of debt. As the economy enters unchartered waters with record high volatility, low interest rates and expectations of rising insolvencies and credit stresses, with no clear end in sight, insurers may increase FHLB usage, if capacity is available.

There has been an uptick in demand since late February, and insurers are positioning themselves to borrow as the economic situation remains fluid. In AM Best’s view, funding agreements between the FHLB and insurers that are used for spread enhancement qualify for operating leverage treatment, if insurers can demonstrate strong asset-liability and liquidity management expertise. Credit for operating leverage ceases once the sum of activities qualifying for operating leverage exceed 30% of consolidated liabilities (excluding separate account liabilities). AM Best will continue to review each of its rated entities’ FHLB borrowing to determine the leverage treatment and risk charges to apply in its Best’s Capital Adequacy Ratio model.

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=296354.

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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