Loans from Federal Home Loan Banks: An opportunity for US insurers to enhance investment yield and total return

Abigail Clare, Client Service Manager
Archived info
Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.

The 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 2022, 552 insurance companies were members of the Federal Home Loan Bank (FHL Bank or FHLB) system and had borrowed close to US$130 billion from it.1 FHL Banks 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 FHL Banks are regional cooperatives of mortgage lenders owned and governed by their 6,549 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.

Individually and as a whole, FHL Banks are liquidity providers; they extend attractive financing to member companies who in turn offer loans to homeowners. Government support and the fact that each bank is responsible not only for its own debt but that of every bank in the system, are what enable the FHL Banks to pass on cost savings to members.

To become a member, an institution must: (1) meet a minimum holding threshold for residential mortgage-backed securities (MBS); (2) purchase FHLB stock; and (3) meet certain credit-rating metrics of the FHL Banks. Membership is applied for and maintained at the holding-company level. The location in which an insurer conducts their principal course of business (e.g., the location of the board or executive team) typically determines that company’s regional or “home” FHL Bank. The amount of FHLB stock required to be purchased varies across FHL Banks, but typically is a small percentage of an insurer’s invested assets. FHLB stock is not publicly traded but can be redeemed for par at the issuing bank under each bank’s conditions. Once companies have met the membership requirements, they are able to apply for a secured loan, referred to as an “advance” by the FHL Banks.

Borrowing limits, loan pricing, available maturities, collateral requirements

Maximum borrowing limits for advances vary by FHL Bank, but commonly fall between 20% and 60% of total assets. Member advances are priced at fixed or floating rates across a range of maturities, from overnight to 30 years. According to the most recent FHL Bank Office of Finance investor presentation, floating-rate advances, as a percentage of total advances, peaked in 2016 at just over 50%, dropping closer to 20% at the end of Q1 2022 as fixed-rate advances gained popularity. The maturity of advances has lengthened in tandem with this trend: Close to 95% of advances fell within the less-than-one to five-year range in 2016, falling to approximately 70% by Q1 2022. While rates are regularly updated and differ across banks, Figure 1 lists a sampling of rates as of early-June 2022.

Figure 1

To capitalize advances, borrowers must purchase activity-based FHLB stock in addition to the stockholdings required for membership. The FHL Bank Office of Finance cites a typical rate of 4% – 5% of principal borrowed. Both membership and activity-based stock types pay a dividend. This capital is usually returned to the member via stock buyback once the advance is repaid. Advances are also required to be fully collateralized by securities or loans; specific requirements for such collateral vary by regional FHL Bank and the prospective borrower’s credit status. Typically, eligible collateral must be single-A rated or above and housing-related including: US Treasuries, agency debt, agency and non-agency MBS, commercial MBS, municipal bonds (with proof that these are housing-related), cash, deposits in the FHL Bank, and other real-estate-related assets. Most, if not all, insurers typically already own many of these eligible collateral types. Corporate bonds, private debt, and equities are not accepted as collateral. The haircuts applied to collateral vary by bank and by member-applicant (Figure 2).

Figure 2

Securities collateral is delivered to an approved third-party custodian or to the FHL Bank or is pledged by completing a form to secure the advance. Monitoring of collateral and lending capacity is ongoing and calls for additional or substitute collateral may be issued by an FHL Bank to protect its credit interest. In addition, the FHL Bank lender has senior-most claim on pledged collateral. While the FHL Bank system recorded losses from exposure to swaps issued by Lehman Brothers in the global financial crisis (at the time, all FHLB debt was swapped to 3-month LIBOR, hence the exposure), the collateralization requirements have helped ensure that no FHL Bank has ever incurred a credit-related loss from a member.

Strong growth in FHLB insurer membership, borrowings

FHL Banks are able to offer extremely competitive interest rates compared to commercial lenders, and recognition of this membership benefit continues to grow among insurers. Year-over-year growth of insurer membership in the FHLB system has been continually positive over the past 22 years. Eighteen insurers joined the FHLB in the first quarter of 2022, which could put 2022 on pace to surpass 2015’s new joiner total of 68 insurers.

These members are taking advantage of attractive borrowing terms: Advances to insurance-company members reached an all-time high of nearly US$130 billion in 1Q 2022. In a survey of our insurance clients on their use of FHLB advances,3 respondents cited an array of uses for the funds, including untapped emergency liquidity, active liquidity spread enhancement investing, asset and liability management (ALM) needs, acquisition funding, and refinancing of 144a debt.

More broadly, membership by insurers grew at an annual pace of 10% in the 10 years 2012 – 2021. The percent of total par value of insurer advances rose 12% annually over the same period, based on data from FHLB Office of Finance reports. As of 1Q 2022, insurance companies had borrowed 40% of total outstanding FHLB advances, or US$127.72 billion. Advances were extended to 241 distinct member borrowers out of 552 total FHLB insurance members, a historic high (Figure 3).

Figure 3

By business type, life insurers have been the biggest borrowers based on annual filings, followed by P&C and health writers. The MetLife Inc. group ranked as the largest insurance-company borrower at the consolidated level, based on US$16.2 billion in advances outstanding as of 1Q 2022. In 2021, 38% of life, 14% of P&C, and 8% of health filers reported available FHL Bank lending capacity or outstanding advances. These filers represent 91% of life, 48% of P&C, and 49% of health industry admitted cash and invested assets, respectively, as reflected in Figure 4.

Figure 4

Assuming a 5% haircut on posted collateral, we estimate outstanding borrowing capacity of US$195.7 billion across life borrowers, US$21.5 billion across P&C borrowers, and US$4.0 billion across health borrowers (Figure 5).

Figure 5

While insurance companies rarely make up more than 6% of total FHLB member borrowers, they have a 30% share of par value advances because their borrowings tend to be larger than those of other member types. It is worth noting that insurers’ move from 18% of par value of advances held in 2019 to 30% of total advances in 2020 resulted from a combination of an increase in borrowing by insurers and a 16% drop in advances held by commercial banks year over year. The costs to an FHL Bank of making a loan vary little by loan size, so taking larger advances may help insurers obtain relatively favorable loan terms.

Putting loans to work

How are insurers using their increased FHLB borrowings? Unsurprisingly, during the financial crisis and recent pandemic, insurers’ liquidity needs drove a surge in advances. Liquidity remains a dominant motivation today, for a wide range of uses: to fund a merger or acquisition, meet regulatory requirements, and serve as a working-capital backstop. Insurers also use FHLB loans to manage and mitigate interest-rate and other risks, optimize Risk Based Capital (RBC), reduce cash drag, meet social goals, supplement ALM duration, and arbitrage collateral. For example, insurers may borrow funds to lock in reinvestment rates and extend the duration of existing investment portfolios, or to fill liability maturity gaps and tighten up ALM duration.

An opportunity for spread enhancement

We believe insurers may find benefit from FHLB borrowings in yield arbitrage, where there is potential to earn excess spread over the cost of an FHLB advance. Portfolios structured with an objective of spread enhancement over the low rate of an FHLB advance may offer possibilities for insurers to add alpha or yield. Among the investment approaches we have seen implemented are securitized instruments, including collateral loan obligations (CLOs), and corporate credit. (CLOs and short credit have even more appeal in a rising-rate environment.) Furthermore, FHL Banks can be flexible in structuring loans, offering a range of choices in addition to term and rate selection including fixed or floating-rate pricing, prepayment, and structured options.

Floating-rate programs have been more advantageous for insurers looking to implement spread enhancement programs. Insurers have used short- to intermediate-term advancements to fund these portfolios, with the exact advance structure dependent on risk preferences and intended asset portfolio composition. Terms will vary from bank to bank but borrowers are generally provided the ability to roll advances at the end of each term. Notably, the FHLB has converted the structure of their floating-rate product from a LIBOR-based structure and now offer Discount Note (DN), Prime, and SOFR indexed floater structures. It would appear that these alternatives have historically provided a better rate to borrowers and we view this change as a net positive for insurance-company borrowers.

Regulatory treatment

FHL Banks do not restrict how their members use advances. However, insurers must take into account how ratings agencies assess spread-enhancement activities, how these programs affect RBC, and how state laws may impact investment parameters. Advances, including those drawn for spread enhancement, are classified as either funding agreements, which are largely specific to life insurance companies or debt. Funding agreements (deposit-type contracts issued as general account obligations) are usually treated as operating leverage. According to a recent NAIC Capital Markets Bureau report, “approximately 75-80% of FHLB advances to U.S. insurers are in the form of funding agreements.” However, advances carried as debt can also qualify as operating leverage if they meet criteria of individual ratings agencies.

A.M. Best, Moody’s, S&P, and Fitch have all noted the broad benefits of the growing relationship between insurers and the FHLB. More specifically, A.M. Best and S&P have established guidelines on how each agency treats spread-enhancement activities. These guidelines cover classification of an FHL Bank advance as operating or financial leverage, how the advance might affect the strength of the insurer’s balance sheet, and the resulting rating. The criteria for spread-enhancement activities to qualify as operating leverage include interest-rate duration matching between the assets purchased and the underlying debt; credit quality; liquidity risk; intent and purpose of the program; positive spread generation; risk controls; and sufficient reporting data. Further, A.M. Best notes that an investment leverage portfolio (one created with borrowed funds) cannot exceed 20% of reserves at the operating company level.

RBC impact for FHLB spread lending programs will vary by business line, size of advance, posted collateral, and investment allocation. Figure 6 summarizes potential RBC charges assuming the spread portfolio is invested with a minimum quality of NAIC 2 and an asset mix of 50% NAIC 1 bonds and 50% NAIC 2 bonds. Life insurance companies that structure a spread lending advance within a funding agreement, as illustrated, benefit from a 2018 update to the RBC framework: Capital charges are assessed only on the portion of collateral above and beyond the advance amount. Assuming an advance of US$100 million and a collateral basket receiving a 10% haircut, a life insurer would need to post US$110 million in total collateral. The US$100 million collateral amount equal to the advance does not generate a capital charge; instead, only the US$10 million of overcollateralization falls into scope for an RBC charge.

Figure 6

Finally, regulatory requirements of the 50 states are too varied to address here but should be considered in the construction of the investment portfolio and viable spread targets. Investment managers and consultants are ably positioned to assist in this area.

Using FHLB advances to potentially enhance yield/generate alpha: Key considerations

Drawing on our experience in establishing these types of mandates with insurance clients, we suggest a few other points to consider:

  1. Sizing of the advance and overall FHLB capacity is constrained by the amount of eligible collateral that is available to pledge. Many insurers maintain spare borrowing capacity for emergency liquidity purposes.
  2. We think the pace of borrowing is essential. It is important to plan the tranches of cash flows in accordance with how quickly the cash can actually be invested into the particular asset class; we have found it is best to avoid sitting in cash while paying interest on an advance.
  3. Establishing clear and comprehensive guidelines for yield-enhancement activities is also critical, in our view. Including a liquidity component and explicitly addressing other requirements for meeting regulatory and ratings-agency constraints can demonstrate intent to regulators and also create a clear framework for the investment manager.
  4. From the outset, it is important to determine the metrics of success and how performance will be measured. For example, many of our insurance clients track investment income from their FHLB spread lending portfolios against an annual target. Considerations in determining an appropriate target include expected portfolio income, FHLB dividends, investment management fees, and borrowing costs.
  5. Finally, a written document, of course, cannot replace the importance of ongoing communication between insurer and investment manager on pace and implementation. Frequent contact, especially in the ramp-up phase, is essential, as is the ability to generate reporting metrics that provide transparency to the insurer’s investment committee, board, and regulators.

Potential risks

It is also critical to understand the possible risks for these solutions. Insurers, as institutional investors, continually assess the available levers they can pull to potentially increase income. But each lever has potential trade-offs. By going lower in quality, insurers face credit risk. If they go private, this presents liquidity risk. By adding longer duration, insurers increase their term risk.

One way to think about FHLB spread lending mandates is that insurers are increasing potential income by adding leverage to high-quality assets using inexpensive term financing. Importantly, there are some risks to seeking to add income this way, which vary depending on the insurer’s chosen arbitrage approach:

Mark-to-market risk
These portfolios are comprised of daily-priced credit assets that will experience changes in spread. Another way to think about this could be spread duration risk, since the liability (the FHLB loan) has no spread duration, whereas a portfolio of CLOs, as an example, typically has a spread duration of five to seven years. As spreads change, the market value of the portfolio will change accordingly. In theory, this risk can be mitigated if assets are held until maturity of the loan, assuming no principal losses on the bonds held. However, if the asset portfolio were liquidated prior to maturity, then there could be a realized loss (gain).

Credit risk
As with any investment, the value of a fixed income security may decline. In addition, the issuer or guarantor of that security may fail to pay interest or principal when due, as a result of adverse changes to the issuer’s or guarantor’s financial status and/or business. In general, lower-rated securities carry a greater degree of credit risk than higher-rated securities.

Collateral risk
The terms of each FHLB loan will dictate the required collateral terms, but if the value of the collateral were to drop significantly, the insurance company borrower might need to post additional collateral.

Customized investment solutions that build on the FHLB lending opportunity

Working collaboratively with insurers, we have created investment solutions with custom objectives and risk profiles that seek to capitalize on the FHLB lending option. Figure 7 includes example portfolios that show how an insurer might implement this idea. The fixed-rate lending examples (shown in dark blue) of two-, five-, seven-, and ten-year terms, respectively, each comprise a hypothetical portfolio of 100% corporates matched to fixed-rate loans that have a cost of a treasury rate plus a spread. The floating-rate lending example (shown in light blue) is a 100% CLO portfolio matched against a floating-rate loan with a five-year term and has a cost of SOFR plus a spread. At times, the FHLB offers loans prepayable by the insurer, which we frequently recommend due to the minimal cost and increased flexibility.

Figure 7

These example portfolios consider NRSRO and rating agency guidelines with regard to liquidity and quality considerations. Historically, we have seen the most uptake in floating-rate advance options. This has been driven by the attractiveness of CLOs relative to other investment-grade asset classes, as the 100% CLO portfolio historically presents the best arbitrage opportunity. Within the CLO portfolios, we have seen a mix of credit risk ranging from 100% AAAs to a blend of A or better (as shown in Figure 8). Some clients have opted for more broad securitized portfolios using other floating-rate assets like Single Asset Single Borrower commercial mortgage-backed securities (CMBS). More recently we have seen an uptick in interest in longer duration (~10 year) fixed-rate loans given an attractive spread and the opportunity to lock in low funding rates for a long period of time. The trend within fixed-rate loans has been toward 100% corporate credit given that this sector best maximizes the arbitrage, but introducing other credit sectors such as securitized or taxable municipals could further improve spread.

Figure 8


Use of FHLB lending facilities has been on the rise among insurers. Our insurance-client base has increasingly studied the borrowing options to meet a variety of needs, ranging from liquidity to spread enhancement. We believe that the FHLB advance program provides compelling potential for insurers to add alpha or increase yield by borrowing at low rates and investing in risk-appropriate markets. Combined with the favorable treatment FHLB debt may receive as operating leverage by regulators, we believe this program is worth consideration.

To read more, please click the download button below.

1Federal Home Loan Banks 2020 Combined Financial Report. | 2More background on the FHLBank system is available from its Office of Finance, The FHL Bank of Chicago offers further Information for insurers at and the NAIC recently published a Capital Markets Bureau primer on FHLB Capital Markets Bureau primer on FHLBs at

Read next