Oldwick, N.J.–(BUSINESS WIRE) – Proposed changes to risk-based capital requirements for financing agreements and other agreements between federal Home Loan Banks (FHLB) and insurance companies could, according to a new A.M. Better report, encourage increased use of FHLB by insurers. The Best`s special report, entitled “Funding Agreements with Federal Home Loan Banks Likely To Increase”, finds that, as a result of the proposed amendments to the Naic Life Risk-Based Capital Working Group, amounts that are mortgaged as collateral for financing agreements with FHLB would not be considered commercial risk charges under various conditions. With the removal of the business risk burden, it may be more attractive, especially for life/pension insurers, to participate in a financing agreement entered into by the FHLB, given that the return on investment will be higher. Claims/accident companies can also increase their use of FHLB programs, as claims/accident companies would be able to mortgage certain municipal obligations as collateral. A.M. Best considers that funding agreements between FHLB and insurers used for spread improvement are qualified for the treatment of operational levers when insurers can demonstrate strong expertise in asset and liquidity management. A.M. Best will audit the borrowing and use of FHLB on a case-by-case basis to determine the leverage treatment and risk costs applied in its best capital adequacy ratio model.
FHLBs have been very stable and have held up in difficult times, with borrowing by member companies increasing during the financial crisis; However, they are subject to risks linked in particular to slowdowns in the real estate and mortgage markets, which could limit members` borrowing capacity. According to the report, L/A companies have the highest carry value of guarantees mortgaged to FHLB and mortgaged guarantees are increasing for all insurance segments. Health insurers have the most credit over the past five years, followed closely by L/A insurers. Healthcare companies use FHLB credits in part to meet cash management needs related to the Patient Protection and Affordable Care Act. Loans from property and casualty insurers have been low compared to mortgaged collateral, as they tend to use FHLB programs as a backstop rather than as active spread management, although their use of matched trades has increased. George HansenSenior Industry Research Analyst+1 908 439 2200, By 5469george.hansen@ambest.comorChristopher SharkeyManager, Public Relations+1 908 439 2200, Paration 5159christopher.sharkey@ambest.comorJim PeavyDirector, Public Relations+1 908 439 2200, issue 5644james.peavy@ambest.com Copyright © 2018 by A.M. Meilleur Rating, Inc. and/or its subsidiaries.
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