Understanding the relationship between life insurers and the Federal Home Loan Banks
By McMenamin, Robert | |
Proquest LLC |
This article describes the growing relationship between life insurance companies and the Federal Home Loan Banking (FHLB) system. Given the important role that both play in the U.S. financial system, it is important to understand how they are connected.
The FHLB system
The Federal Home Loan Banks were established in 1932 to support the housing market by providing low-cost funding to financial institutions that make loans to homeowners. The FHLB system comprises 12 regional banks and the
To be eligible for FHLB membership, a company must be engaged in housing finance, defined as purchasing or originating long-term home mortgage loans or holding mortgage-backed securities. Insurance companies play an important role in housing finance and as of 2012, approximately 15% of the insurance industry's assets supported housing finance.1 Insurance companies (and banks) must apply for membership to the relevant regional FHLB, based on their principal place of business. Belonging to an FHLB is attractive to insurance companies because FHLB advances are a low-cost, flexible source of funding. Insurance companies may use advances to diversify their sources of funding, access liquidity in times of financial disruptions, or enhance investment yields through more robust liquidity management.2
A growing relationship
The percentage of all FHLB advances that were provided to insurance companies quadrupled between 2007 and 2012, growing from 3% in 2007 to 12% and a total of
For the FHLBs, the relative importance of insurance companies as clients varies widely across banks. While two-thirds of FHLBs had less than 10% of total outstanding advances to insurance companies at the end of 2012, the
The use of FHLB advances by life insurance companies is fairly concentrated. The top 15 life insurance borrowers accounted for 90% of FHLB advances to the industry in 2012. However, even for these companies, FHLB advances are a small share of total general-account liabilities.5 Among the three large life insurers-AIG, Prudential, and
Uncertainty during insolvency proceedings
Insurance companies represent an important area of growth for FHLBs, but the FHLBs and their regulator, the
There is some uncertainty surrounding the FHLBs' claim to collateral on outstanding advances made to insurance companies in the case of an insurance company failure. In addition to potential legal uncertainty, insurance company failures happen very infrequently, so the life insurance resolution process is an unfamiliar and largely untested process for many FHLBs. While FHLBs have a long relationship working with the
The case of Standard Life Insurance Company of
While
For their part, insurers have raised the concern that an FHLB might require an insurer to post additional collateral for an advance if the insurance company's financial performance deteriorates.13 This could potentially limit the flexibility of FHLB advances and make them more expensive at the very time they could be most useful.14
Both insurers and the FHLB system could potentially benefit from uniform and clear rules about FHLBs' rights in insolvency proceedings. The FHFA, which regulates the FHLBs, would like to clarify their status as a secured creditor with a protected first priority security interest in the collateral on their advances to insurers.15 This would give FHLBs protection from legal delays that could prevent them from accessing collateral in a timely fashion in order to recoup their losses. Legal clarity might also benefit insurance companies if it leads to more favorable collateral practices in FHLB lending, similar to the treatment banks currently receive.
Conclusion
The relationship between insurance companies and Federal Home Loan Banks is important and growing. While FHLB advances are small relative to total generalaccount liabilities for most insurance companies, FHLB membership can provide them with an important source of liquidity in times of need. The share of FHLB advances going to insurance companies quadrupled from 2007 to 2012, and many FHLBs have expressed a desire to expand their insurance company membership. These trends have led to an increased focus on reducing any uncertainty regarding the treatment of FHLB advances and the collateral that backs them in the resolution process for insolvent insurance companies. Given the significant role that both life insurers and the FHLBs play in the U.S. financial system, and in housing finance in particular, it is important to understand their relationship with one another.
As of 2012, approximately 15% of the insurance industry's assets supported housing finance.
The top 15 life insurance borrowers accounted for 90% of FHLB advances to the industry in 2012.
Of the top 15 FHLB life insurance borrowers, only three had FHLB advances that accounted for more than 5% of their general-account liabilities.
1 This number is an approximation calculated from the insurance industry's aggregate holdings of agency mortgage-backed securities (MBS), nonagency MBS, mortgage loans, and real estate. These categories may contain a small number of nonresidential loans. Data are from insurance company statutory filings from SNL Financial.
2 See www.fhlbc.com/Members/Pages/ federal-home-loan-bank-chicago-membersinsurance-companies.aspx.
3 The percentage of FHLB insurance advances made to life insurance companies was calculated using total life insurance FHLB liabilities as of 2012 from SNL Financial and total advances made to the insurance industry as reported in the 2012 FHLB annual statement; see www.fhlb-of.com/ ofweb_userWeb/resources/l 2yrend.pdf.
4 See www.naic.org/documents/committees_ e_rfhlbl_sg_related_docs_fhlb_memo_ 130619.pdf.
5 Life insurers segregate their assets (and, by extension, their liabilities) into two independent "accounts" on their balance sheets- the general account and the separate account. General-account assets support liabilities that feature guaranteed returns to customers from the insurer. In contrast, separate-account assets support "passthrough" products, in which investment gains and losses are passed on to the customer and no more than a minimum return may be guaranteed. Only
6 See www.financialstabilityboard.org/ publications/r_l 30718.pdf.
7 AIG's and Prudential's outstanding FHLB advances were obtained from their 2012
8 Unless otherwise noted, all numbers in this paragraph are based on authors' calculations using statutory filings data from SNL Financial.
9 Federal bankruptcy law specifically excludes insurance companies from bankruptcy proceedings.
10 See www. iair. o rg/asse ts/ Insuran ceRe cei ver/ the % 20insurance % 20rec eiver-% 20summ er %202013.pdf.
11 See www.naic.org/documents/committees_ e_rfhlbl_sg_related_docs_fhlb_memo_ 130619.pdf.
12See www.fhlbi.com/about/documents/ FedHomeLoanBankFundingFigures2013.pdf.
13See www.fhlb-of.com/ofweb_userWeb/ resources/lendingqanda.pdf.
14See www.naic.org/documents/committees_ e_rfhlbl_sg_related_summary_state_ survey.pdf.
15See www.naic.org/documents/committees_ e_rfhlbl_sg_related_fhlb_exec_summary.pdf.
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Copyright: | (c) 2014 Federal Reserve Bank of Chicago |
Wordcount: | 1704 |
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