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

FHL Banks lend to insurers at very competitive rates, providing opportunities to add alpha or enhance yield. Also, FHLB debt may receive favorable treatment by A.M. Best. We give examples of customized investment solutions that capitalize on these advantages.

ANY VIEWS EXPRESSED HERE ARE THOSE OF THE AUTHOR AS OF THE DATE OF PUBLICATION, ARE BASED ON AVAILABLE INFORMATION, AND ARE SUBJECT TO CHANGE WITHOUT NOTICE. INDIVIDUAL PORTFOLIO MANAGEMENT TEAMS MAY HOLD DIFFERENT VIEWS AND MAY MAKE DIFFERENT INVESTMENT DECISIONS FOR DIFFERENT CLIENTS.

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 A.M. Best.
  • We provide examples of customized investment solutions that can enable insurersto capitalize on the advantages of FHLB borrowings.

AS OF 31 DECEMBER 2018, nearly 440 insurance companies were members of the Federal Home Loan Bank (FHLBank or FHLB) system and had borrowed over US$100 billion from it. 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 A.M. Best, 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 nearly 7,000 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 (MBS) is eligible for membership.1

To become a member, an institution must purchase FHLB stock and meet certain credit-rating metrics of the FHLBanks and nationally recognized statistical rating organizations (NRSROs). Membership is applied for and maintained at the holding-company level. The amount of FHLB stock required to be purchased varies across FHLBanks, but typically is a small percentage of an insurer’s invested assets. Once the membership requirements have been met, member companies are able to apply for…

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1More background on the FHLBank system is available from its Office of Finance, www.fhlb-of.com. The FHL Bank of New York offers further Information for insurers at https://www.fhlbny.com/become-a-member/about-membership/insurance/

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