OLDWICK, N.J.--(BUSINESS WIRE)--Proposed changes to risk-based capital requirements for funding agreements and other arrangements between Federal Home Loan Banks (FHLB) and insurance companies could spur increased FHLB usage by insurers, according to a new A.M. Best special report.
The Best’s Special Report, titled, “Funding Agreements With Federal Home Loan Banks Likely To Increase,” states that under the proposed changes by the NAIC Life Risk-Based Capital Working Group, amounts pledged as collateral for funding agreements with the FHLB would not be assessed business risk charges under various conditions. With the removal of the business risk charge, life/annuity (L/A) insurers in particular may find it more attractive to engage in funding agreement borrowing from FHLB’ as returns on capital will be higher. Property/casualty companies may also increase their usage of FHLB programs, given that property/casualty companies would be able to pledge certain municipal bonds as collateral.
FHLB’ are government-sponsored enterprises regulated by the Federal Housing Finance Agency. They serve the public by providing readily available, low-cost sources of funds that are used for mortgages, as well as housing and community developments. There are currently 11 FHLB’ in the United States, with coverage reaching all 50 states, including the District of Columbia and U.S. territories.
According to the report, L/A companies have the highest carry value of collateral pledged to FHLB’, and pledged collateral is growing for all insurance segments. Health insurers account for the highest percentage of borrowing over the last five years, followed closely by L/A insurers. Health companies are using FHLB borrowings partly for cash management needs related to the Patient Protection and Affordable Care Act. Property/casualty insurers’ borrowings have been low relative to pledged collateral because they tend to use FHLB programs more as a backstop than for active spread management, although their use of matched trades has increased.
A.M. Best views funding agreements between FHLB’ and insurers that are used for spread enhancement as qualifying for operating leverage treatment, if insurers can demonstrate strong asset-liability and liquidity management expertise. A.M. Best will review FHLB borrowing and usage case by case, to determine the leverage treatment and risk charges applied in its Best’s Capital Adequacy Ratio model. FHLB’ have been very stable and have held up during difficult times, with borrowing by member companies growing during the financial crisis; however, they are subject to risks, particularly those related to downturns in the housing and mortgage markets, which could limit members’ borrowing capacity.
To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=273363.
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