OLDWICK, N.J.--(BUSINESS WIRE)--Overall issuance of funding agreement-backed securities (FABS) by U.S. life/annuity insurers has seen a sizable uptick over the past few years after the market essentially shut down in 2009 following the financial crisis. According to data compiled by A.M. Best, there was approximately $16.0 billion of FABS issuances by life/annuity insurers in 2015, a slight decline from 2014, but still up from the post-crisis lows.
The Best Special Report, titled, “The Funding Agreement-Backed Securities Market Has Returned,” states that during and immediately after the financial crisis, insurers found that their funding costs generally widened, making the spread lending business more challenging. Coupled with softened investor demand due to the liquidity freeze, FABS issuance dropped precipitously.
Today, insurers and investors are in much better financial condition and more liquid, and in this low interest environment, they each are looking for yield. The FABS market is primarily driven by how investment opportunities trade relative to other issuances, such as industrials, rather than nominal rates. Insurers are being opportunistic, taking advantage of periods of wider net spreads. Rather than setting specific target volumes, insurers are focused on return on equity (ROE) and other profitability measures vis-à-vis alternative opportunities.
The number of participants in the FABS market is relatively small, though growing. In recent years, the market leader has been Metropolitan Life Insurance Company (MetLife). At times, MetLife has accounted for approximately 40%-60% of total issuances per year. Consequently, MetLife can influence the trends within the market. It is worth noting that the insurers with larger FABS exposures tend to be more highly rated and have more financially sound balance sheets, as a strong risk management process is at the heart of the business.
According to the report, an interesting trend has been a migration toward larger, more liquid transactions over the last few years. For example, there were 34 transactions in 2015 totaling $16.0 billion, compared with 196 issuances in 2008 totaling only $21.7 billion, representing nearly 85% fewer transactions but just one-fourth of a decline in issuance values. The disappearance of the Euro market and the decline in reverse inquiry transactions are a couple reasons for this. While FABS are issued in other foreign currencies, these transactions are typically converted back to U.S. dollars to shield issuers from foreign exchange risks. Since 1998, 83.7% of the total issuance count has been issued in U.S. dollars.
A.M. Best views FABS programs as a reasonable activity for highly rated operating companies with diverse lines of business, considerable expertise in asset/liability and investment management and strong financial flexibility.
To access a copy of this special report, please visit http://www3.ambest.com/bestweek/purchase.asp?record_code=248949.
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