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- 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 DECEMBER 2020, 528 insurance companies were members of the Federal Home Loan Bank (FHLBank or FHLB) system and had borrowed over US$150 billion from it.1 FHLBanks lend to insurers at very competitive rates, creating potential opportunities to add alpha 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 6,697 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, FHLBanks 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 FHLBanks to pass on…
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1Federal Home Loan Banks 2020 Combined Financial Report. | 2More background on the FHLBank system is available from its Office of Finance, www.fhlb-of.com. The FHL Bank of Chicago offers further Information for insurers at https://www.fhlbc.com/solutions/details/how-insurance-companies-benefit-from-anfhlbank-membership-q2-2019 and the NAIC recently published a Capital Markets Bureau primer on FHLBs at https://content.naic.org/sites/default/files/capital-markets-primer-federal-home-loan-banks.pdf.