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American Family turns to familiar source in funding $1B-plus Ameriprise deal

Nearly six years after using novel means to fund a sizable acquisition, American Family Mutual Insurance plans to take a similar approach for its latest large deal.

The company has laid the groundwork to borrow up to $500 million from the Federal Home Loan Bank of Chicago to help finance its pending $1.05 billion acquisition of the auto and home business of Ameriprise Financial Inc., according to documents posted by the Wisconsin Office of the Commissioner of Insurance in advance of an Aug. 20 public hearing on the transaction.

American Family obtained a 30-year, 5.12% fixed-rate advance of $500 million from the Chicago home loan bank in November 2013 in connection with its $660 million acquisition of Homesite Group Inc. The company purchased nearly 41,000 of the Chicago home loan bank's common shares in connection with the transaction, raising its total stake to 100,000 shares.

It also borrowed from the Chicago home loan bank on a much smaller, shorter-term basis to help support certain non-insurance business development and acquisition activities. That one-year advance carried a fixed rate of 1.95%, and American Family repaid it in full during 2018. American Family's holdings of the Chicago home loan bank's shares increased to 126,000 at year-end 2017, then declined back to 100,000 shares by the end of the following year.

The Form A for the change in control of IDS Property Casualty Insurance Co. and Ameriprise Insurance Co., the two domestic property and casualty subsidiaries of Ameriprise, indicates that American Family plans to use approximately $50 million of cash on hand, $500 million from the liquidation and/or maturities of short-term investments and $500 million in borrowings from the Chicago home loan bank to cover the agreed-upon purchase price.

American Family said in the filing that it has "the ability and flexibility to pay the Purchase Price from its existing funds," but opted to use the financing in order to "more efficiently deploy its existing capital." The American Family group had $6.34 billion in statutory surplus as of Dec. 31, 2018, according to its most recent combined annual statement. American Family Insurance Mutual Holding Co., the upstream entity that is effectuating the Ameriprise auto and home transaction, had GAAP equity of $9.01 billion on that date.

Materials submitted by American Family by exhibit to the Form A include a March memo from the Chicago home loan bank in which the institution spells out the insurer's borrowing capacity. American Family maintains access to short- and long-term credit products on a secured basis of up to 20x its capital stock investment in the Chicago home loan bank and no greater than the lesser of 25% of its statutory admitted assets or 100% of its statutory surplus, according to the document. Borrowings must be secured by what the Chicago home loan bank deems to be eligible collateral.

American Family, on a stand-alone basis, had nearly $18.12 billion in total net statutory assets as of March 31, suggesting maximum borrowing capacity of approximately $4.53 billion under the formula outlined above, not including the $500 million outstanding advance.

The Form A did not include specific details about the terms of the new advance, as American Family said they would depend upon market conditions, eligible securities and management's discretion. The filing noted, however, that the Chicago home loan bank's rate for a 30-year, fixed-rate advance as of March 28 was 3.61%. A rate sheet dated Aug. 6 indicates a rate of 3.23% for an advance of that nature.

Insurance companies accounted for 34.5% of the aggregate par value of the Chicago home loan bank's outstanding advances as of year-end 2018. A majority of those insurance company advances related to a single captive insurance subsidiary of a multinational commercial bank, however.

According to data compiled on a best-efforts basis by S&P Global Market Intelligence as of Dec. 31, 2018, only MetLife Inc.'s U.S. subsidiaries had a greater amount of borrowings outstanding from a federal home loan bank than American Family among property and casualty groups. MetLife's U.S. life units had a far larger sum of borrowings, reflecting the greater reliance on that funding source by the life insurance industry, in general.

The banking unit of State Farm Mutual Automobile Insurance Co. ranked as the Chicago home loan bank's fourth-largest advance-taker at year-end 2018.

American Family and Ameriprise expect their deal to close before the end of the year.