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ChangeThe views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
Key points
- Federal Home Loan Banks lend to insurers at very competitive rates, providing opportunities to add alpha or enhance yield by borrowing at low cost and investing in risk-appropriate markets.
- Adding to its appeal, FHLB debt may receive favorable treatment as operating leverage by ratings agencies.
- We provide examples of customized investment solutions that can enable insurers to capitalize on the advantages of FHLB borrowings, and we also note potential risks.
As of 31 March 2025, 600 insurance companies were members of the Federal Home Loan Bank (FHLBank or FHLB) system and had borrowed over US$164 billion from it year to date.1 Insurance company participation in the FHLB system directly supports FHLBanks’ ongoing mission to provide affordable lending to residential mortgage borrowers. FHLBanks lend to insurers at very competitive rates, creating potential opportunities to add income or enhance yield by borrowing at low cost and investing in risk-appropriate markets. When combined with possible favorable treatment from ratings agencies, we believe this program is worth consideration by US insurers.
Federal Home Loan Banks: Designed to support the US housing market
The FHLBanks are regional cooperatives of mortgage lenders owned and governed by their 6,468 members, which include commercial banks, savings and loan institutions/thrifts, credit unions, community development financial institutions, and insurance companies. Any entity designated as a financial institution under the Federal Home Loan Bank Act of 1932 that is in good financial standing, and that owns or issues mortgages or mortgage-backed securities, is eligible for membership.2 Insurers, more specifically, must be chartered by and regulated under the laws of a state.
Insurance companies have been eligible for FHLB membership since the FHLB system’s inception, which is evidence of their importance to the housing market and to the FHLB mission to “provide reliable liquidity to member institutions to support housing finance and community investment.”3 Today, roughly US$1.3 trillion, or 16% of insurers’ invested assets, are allocated to residential mortgage-related investments.4 Insurance companies, through these investments, are liquidity providers for the mortgage-backed securities (MBS) market, which in turn generates cost savings for individual homeowners. Not only do insurers hold mortgage-related investments, they are also largely able to hold those investments over the long term. In periods of market stress, insurers are typically not forced to be sellers, which provides support to capital markets, the home loan market, and individual homeowners. FHLBank lending amplifies insurance-company investment in the home loan market as insurers are required to overcollateralize their advances, or loans, from FHLBanks with residential mortgage-related investments. The FHLB advance program is, in our view, an important tool in …
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1Federal Home Loan Banks 1Q 2025 Combined Financial Report. | 2More background on the FHLBank system is available from its Office of Finance, www.fhlb-of.com. | 3FHLB Office of Finance website. | 4S&P Cap IQ 2024 annual filing data, including RMBS, mortgage loans, and real estate.
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