As the coronavirus pandemic continues to drive uncertainty throughout the re/insurance industry, AM Best believes 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.
An AM Best report shows that FHLB insurance company members grew by more than 8% in 2019 to 471.
Life/annuity 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, AM Best says more of the heightened activity over the last few weeks can be characterised 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, AM Best says more than 95% of borrowings have been in the form of debt.
As the economy enters uncharted 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.
