The pace of insurance borrowings from the Federal Home Loan Bank (FHLB) slowed last year following a spike when many U.S. life/annuity insurance companies took advantage of the lower cost of borrowing to capitalize on high interest rates and new money yields, according to a new AM Best report.

The Best’s Special Report, “Borrowing from the Federal Home Loan Bank Slows Following 2022 Surge,” states that the $142.4 billion borrowed from the FHLB in 2023 represented a year-over-year increase of nearly 3%; however, in the previous year, total borrowings increased by 18%.

“U.S. insurance companies now represent nearly 9% of FHLB membership following the 3% growth uptick last year by insurers, although the vast majority of insurance companies do not have access to secured FHLB loans made available through the program,” said Kaitlin Piasecki, industry research analyst, AM Best.

Life/annuity insurers accounted for 94% of the $142.4 billion borrowed in 2023. Borrowing in the property/casualty segment had more than doubled to $11 billion in 2020 during the pandemic but has fallen each year since and stood at $6.1 billion in 2023, while health insurers borrowed $2.0 billion.

According to the report, insurers typically use two main forms of advances - funding agreements and debt, each of which has a different purpose. Life/annuity insurers use the FHLB primarily to issue funding agreements to enhance net interest income through spread management. This usage rose to 89% at year-end 2023 from 77% in 2017. By contrast, property/casualty and health borrowing have primarily been in the form of debt, which is generally used for liquidity purposes, such as working capital, operational or meeting regulatory capital requirements.

“Although the FHLB provides a less expensive short-term financing option potentially used to increase investment income, there are risks to insurers,” said Piasecki. “An insurer may be exposed to credit risk, collateral risk and market risk. An insurer’s asset-liability management and enterprise risk management strategy should consider the overall market environment, and balance liquidity needs and spread enhancement opportunities.”

To access the full copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=349916.

AM Best is a global credit rating agency, news publisher and data analytics provider specializing in the insurance industry. Headquartered in the United States, the company does business in over 100 countries with regional offices in London, Amsterdam, Dubai, Hong Kong, Singapore and Mexico City. For more information, visit www.ambest.com.

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