Life insurers tap Federal Home Loan Banks in crunch

WASHINGTON (Reuters)—Some of the largest U.S. life insurance companies have increasingly turned to a government-backed banking network for funds as the capital markets have grown cold.
Insurers’ borrowing from the Federal Home Loan Banks—a network of 12 government-sponsored lenders—has been climbing since a global credit crisis took hold in the summer of 2007.

MetLife Inc. borrowed $15.1 billion from the Federal Home Loan Bank of New York in 2008, compared with $4.6 billion a year earlier. Borrowing by Transamerica climbed to $5.5 billion last year from $2.2 billion a year earlier as the life insurer tapped the Federal Home Loan Bank of Des Moines. Transamerica is owned by Dutch insurer Aegon NV.

Spokespeople for MetLife and Transamerica were not immediately available for comment.

The insurance industry has booked huge losses in recent quarters as the investments that underlie consumer policies and retirement products have soured. As ratings agencies have downgraded the credit ratings of insurance companies, their borrowing costs have risen and home loan bank lending terms look more attractive.

“Compared to the commercial paper market and other sources of funds, our prices are better so they are turning to us,” Alfred DelliBovi, president of the Federal Home Loan Bank of New York, told Reuters.

Among the roughly 190 insurance companies that were members of the home loan bank system at the end of 2008 are national life insurance players like Genworth Financial, Ameriprise Financial, Prudential Financial and Lincoln Financial.

‘Looking for liquidity’

Insurers’ stock prices gained on Wednesday after a report that the U.S. Treasury Department was prepared to give some large life insurers an injection of government aid. MetLife and Prudential, the largest U.S. life insurers, have long had bank holding company status, making them eligible for the federal funding.

Several others, including Lincoln and Hartford Financial Services Group Inc., have in recent months reached agreements to buy small banks in a bid to get savings and loan status, which would also bring them within arm’s length of federal aid.

The federally chartered bank system has never experienced a credit loss on its loans—known as “advances”—even through the peak of the damaging savings and loan crisis of the late 1980s. Still, increased use of the system can be a sign that other funding options are too costly for a member bank.

“We are finding that insurance companies are looking for another source of liquidity, with everything that is going on in the banking system,” said Paul Imwalle, the head of member services for the Federal Home Loan Bank of Cincinnati.

Countrywide Financial and Wachovia both boosted their borrowing from home loan banks in the months before those banks failed. Bank of America agreed to acquire Countrywide in January 2008 while Wells Fargo & Co. agreed to buy Wachovia in October.

Major rating agencies continue to have a “negative” outlook on the life insurance sector, and more rating cuts are expected, which would trigger the need to raise fresh capital, a tall order, given the state of credit markets.

Life insurers are the largest source of corporate bond financing in the United States, holding about 18% of all issuance, according to the American Council of Life Insurers.