US insurer membership in FHLB grows

Written by Adam Cadle

01/11/2023

US life/annuity (L/A) insurers increased their borrowing through the Federal Home Loan Bank (FHLB) program by 22% in 2022, as they looked to capitalise on enhanced yields in the higher interest rate environment, according to a new AM Best report.

US insurance companies now represent nearly 9% of FHLB membership, following a 4% growth uptick last year by insurers. However, AM Best noted that the vast majority of insurance companies do not have access to secured FHLB loans made available through the program. During 2022, only 22% of US L/A insurers had borrowing access, compared with nearly 7% of the property/casualty (P/C) segment and slightly less than 3% of health insurers. Borrowing in the P/C segment more than doubled to $11.2bn in 2020 as a result of COVID-19 but has steadily declined and totaled $6bn in 2022. Despite the uptick in industry borrowing, capacity remains available for most insurers across all segments.

“Borrowing grew in 2022 for L/A insurers as they sought to increase investment yields by capitalising on the higher interest-rate environment,” said Kaitlin Piasecki, industry analyst, AM Best. “As for property/casualty insurers, their FHLB borrowing declined last year after peaking in 2020, when they sought extra liquidity as a cushion against the uncertainty brought on by the COVID-19 pandemic.”

The FHLB is composed of 11 regional cooperatives and are privately owned by their members. To gain membership, an insurer must actively participate in mortgage financing, be financially sound, and purchase FHLB capital stock. As members of the FHLB, insurers can apply for secured loans, known as advances, at lower rates. Historically, each insurance segment has had different reasons for using the FHLB.

“Life insurers use it mostly for spread/yield enhancement, while property/casualty and health insurers use it more for liquidity and short-term working capital/operations,” said Jason Hopper, associate director, AM Best.

AM Best estimates that 2022 new money bond portfolio yields were 5.1% for L/A insurers, from 3.6% in 2021.

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