FHLB for Insurers: A Source of Liquidity During Market Dislocations
June 13, 2023
By John Rup, Vice President, and Matthew Reilly, Managing Director, Institutional Solutions
As funding costs rise, credit markets are stressed and investors are distressed, insurers accustomed to a period of low rates may be left wondering what to do next. In response, Conning would suggest insurers consider options to strengthen their balance sheets; one may be a membership with a Federal Home Loan Bank (FHLB).
FHLB membership could be a valuable benefit for insurers as its borrowing programs may help enhance profitability, balance sheet strength and financial stability. FHLB membership is growing among larger insurers and Conning believes it merits further consideration from mid-size companies as well.
Founded in 1932 in response to the Great Depression to support homeownership and distressed lenders, the FHLB system has become increasingly popular as a financing option among insurers. Insurance companies can use the FHLB system and its competitive borrowing rates for emergency short-term liquidity backstops, funding for working capital or strategic investments (including mergers and acquisitions), aid in asset liability management, or potentially generating additional net investment income through spread-investing programs.
A growing number of insurance companies are looking to take advantage of FHLB programs, as witnessed by the continuing increase in its membership rate and borrowing activities (see Figure 1). At year-end 2022, 565 insurance companies were FHLB members, up from 405 at year-end 2017. During that same period, the total principal of outstanding advances to insurers rose to $137 billion from $104 billion, a 6% annual growth rate.1
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1 FHLBank Combined Annual Report, 2022 Year-End; https://www.fhlb-of.com/ofweb_userWeb/resources/2022Q4CFR.pdf
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