OREANDA-NEWS. February 12, 2016. In a new special report, Fitch Ratings reviews insurance company participation in the Federal Home Loan Bank system (FHLB), which has grown by an average of 7.8% annually over the last five years. In addition, several insurance groups have substantially increased their borrowing capacity in the FHLB. Fitch's report also highlights the rationale for membership and the manner in which insurers are utilizing the FHLB as a source of capital.

While FHLB membership is typically associated with commercial banks and other deposit and lending institutions, insurance company membership has grown to include 304 insurers at year-end 2014. Insurers represented 4% of all FHLB members and nearly 13% of all funds advanced to members at year-end 2014.

Despite the recent Federal Housing Finance Agency (FHFA) ruling barring captives from FHLB membership, Fitch believes membership growth will continue among traditional insurers. Insurer membership in the FHLB is weighted largely within the life insurance sector, but property/casualty, and to a lesser extent health insurers, are increasing their participation in the FHLB system.

FHLB membership provides a readily available, low cost source of funds for an insurance company member. Many insurers do not have outstanding advances from the FHLB, but membership provides a valuable source of backup liquidity for an insurer.

While Fitch views FHLB membership positively, FHLB membership has not merited ratings upgrades for individual insurers. Rather, membership is viewed as a potential mitigating factor against negative rating actions related to liquidity in a stress scenario. Conversely, excessive borrowing relative to an insurer's capital base or risky use of FHLB funding could have negative rating implications.

A primary element of the FHLB system is collateralization of advances when loans are made. Various parties are currently seeking to address certain regulatory uncertainty and inconsistency among state's insurance laws as to the treatment of FHLB collateral in insolvency. Resolution of these issues could further increase the use of the FHLB system by insurance companies.

Additionally, the expanded acceptance of commercial whole loans and municipal securities as acceptable forms of collateral by some FHL Banks has driven growth in advances to insurance company members and may drive further growth in new insurance members.

The full report: The Federal Home Loan Bank System's Growing Role in the Insurance Industry is available at fichratings.com