Insight: Life insurers binge on US financing aimed at helping housing

Alliancebernstein Holding LP

05/12/2023 11:00

By Koh Gui Qing
       NEW YORK, Dec 5 (Reuters) - Major life insurers are
accessing cheap funding at record levels from a U.S.
government-backed financing system, sapping billions of dollars
meant to help increase affordable housing, interviews with
industry executives and regulatory disclosures show.
    When Federal Home Loan Banks (FHLBs) were created in 1932 in
the aftermath of the Great Depression to finance firms that
offer home loans, insurers were granted access to this system
because they provided mortgages. 
        They stopped providing mortgages in the following
decades as they became an industry distinct from banking.
Starting in 2008, they have been aggressively drawing on FHLBs,
arguing they support housing because they invest in residential
mortgages and related securities. 
    The extent to which FHLBs finance insurers has not been
previously reported. Reuters interviews with more than a dozen
industry executives and regulators, a review of regulatory
disclosures and data show this borrowing has not been matched by
a rise in home loan affordability, with the cost of mortgages
soaring to its highest in 23 years. 
        The practice has been lucrative for insurance firms that
have locked in billions of dollars in profits by investing the
borrowed money in areas such as commercial real estate mortgages
and corporate and government bonds. It has been predominantly
used by life insurers, because they need to boost their
investment returns with cheap funding to meet long-term
liabilities. 
    FHLBs typically have a lower cost of borrowing than what is
otherwise commercially available, because these banks enjoy an
implicit U.S. taxpayer-backed guarantee on their debt. They
provide the cheap funding to banks and insurers in exchange for
collateral to ensure they get their money back.
    A spokesperson for the Federal Housing Finance Agency
(FHFA), which oversees the FHLBs, declined to comment
specifically on insurers tapping FHLBs, but said the regulator
was considering implementing new requirements for borrowing from
FHLBs to ensure the support of housing and community
development. They declined to provide more details.
    Ryan Donovan, president and CEO of the Council of Federal
Home Loan Banks, a trade association for FHLBs, said the banks
have "abided by the will of Congress" to provide liquidity and
support affordable housing.

    BORROWING BILLIONS
    FHLBs lent a record $137.1 billion to life insurance firms
last year, building on a trend that started around 2008,
according to the FHLB Office of finance. 
    Yet the industry's investments in home mortgages have
dropped. National Association of Insurance Commissioners (NAIC)
data shows that insurance companies have been buying fewer
residential-backed mortgage securities (RMBS), which boost
liquidity in the home mortgage market, while purchases of
commercial-mortgage backed securities (CMBS) have been steady.
    In 2022, life insurance companies bought $193.1 billion
worth of RMBS, down 6% from $205.3 billion in 2021, as soaring
inflation soured their appetite to invest more. In contrast,
their appetite for CMBS remained steady, with purchases totaling
$203.6 billion in 2022, almost flat compared to $204.7 billion
in 2021. 
    Lawrence White, an economics professor at New York
University who recently co-authored research about FHLBs, said
insurers did not need to borrow from FHLBs to invest in
mortgages in the first place.
    "It's an artifact of the 1930s that insurance companies are
part of the FHLB system," White said. 
    MetLife Inc  MET.N , Equitable Holdings Inc  EQH.N , TIAA,
Corebridge Financial  CRBG.K  and Brighthouse Financial Inc
 BHF.O  are among the insurance firms that are prolific users of
FHLB funding, their regulatory filings show. 
        MetLife, TIAA, Corebridge, Brighthouse and Equitable
declined to comment. 
        
  
        
  
    JUICING RETURNS
    Cynthia Beaulieu, a managing director and portfolio manager
at Conning, which manages $205 billion in assets for investors
such as insurance companies, said a majority of her clients use
FHLB loans to generate extra returns because "the arbitrage was
really attractive."
    Life insurers can lock in returns between 85 and 140 basis
points by taking FHLB loans and investing the money in pools of
loans such as collateralized loan obligations, Wellington
Management, a Boston-based investment manager, said on its
website in July. A percentage point is 100 basis points. 
    Insurers are entitled to tap FHLB funding. Yet U.S.
taxpayers are backstopping the insurance industry's profits with
little to show, said Cornelius Hurley, a lecturer at the Boston
University School of Law and a member of the Coalition for FHLB
Reform, a group that calls for changes to the FHLB system to
address unmet housing needs.
    "All (insurers) do is they happen to have some government
securities and mortgage-backed securities in their investment
portfolios. But they don’t provide any public benefit in return
for that," Hurley said. 
      
    AIDED BY REGULATORS
    To be sure, banks have also been stepping up their borrowing
from FHLBs to tap cheap funding. An FHFA report published last
month showed how some troubled regional banks, including Silicon
Valley Bank and First Republic, were using FHLBs as lender of
last resort, encouraging risk-taking that hastened their
collapse.
    Insurers’ borrowing from FHLBs picked up in 2008 financial
crisis, as those that spread themselves thin with aggressive
investments scrambled for cash. Subsequent regulatory changes
emboldened insurers to borrow more. 
    The National Association of Insurance Commissioners (NAIC),
which sets policy that many state insurance regulators follow,
allowed insurers in 2009 to treat FHLB borrowing as "operating
leverage" rather than debt, as long as they use the money for
investments.
    This gives insurers more room to saddle themselves with more
with debt, because borrowing from FHLBs weighs less on their
capital ratios than commercial borrowing, FHLB officials,
analysts and economists say. It can also give them a more
favorable credit rating, allowing them to borrow more debt at
cheaper rates. 
    In 2018, the NAIC again made FHLB borrowing more attractive
for insurance companies, by requiring them to hold less money
aside for every dollar they borrow from FHLBs.
    The NAIC declined to comment.
    The reduced capital charges can more than double insurers’
return on investments from FHLB loans, according to FHLB
Chicago. On its website, it gives examples of how insurers can
borrow from it to invest in commercial mortgage securities,
rather than residential mortgage securities that benefit the
housing market directly.
        Michael Ericson, the president and CEO of FHLB Chicago,
said the use of mortgages and mortgage-backed securities as
collateral for FHLB loans helps maintain the FHLBs' nexus to
housing finance.
    Insurers have lobbied to maintain the current arrangement.
The American Council of Life Insurers (ACLI) and the Insurance
Coalition wrote to the FHFA in letters reviewed by Reuters,
arguing that curbing their FHLB borrowing would remove liquidity
from the market for mortgages. They did not explain why insurers
need FHLB funding to invest in mortgages.
    ACLI spokesman Jack Dolan said that life insurers' FHLB
borrowings represented a small fraction of the $8.3 trillion in
assets held by the industry, and that tapping FHLBs was "part of
prudent, long-term risk management strategies." The Insurance
Coalition did not respond to a request for comment.

    <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
The 10 life insurers that are the most prolific FHLB borrowers  
 https://tmsnrt.rs/3QSsATh
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 (Reporting by Koh Qui Ging in New York; Editing by Greg
Roumeliotis and Anna Driver)
 ((Greg.Roumeliotis@thomsonreuters.com; +1 646 223 6022; Reuters
Messaging: greg.roumeliotis.thomsonreuters.com@reuters.net))