The FABS market collapsed during the financial crisis, when institutional investors withdrew from structured product markets6. FABS emissions have recovered somewhat since then, and our latest estimates indicate that FABS unpaid debts reached about $75 billion in 2016:Q1. In a typical FABS structure, a life insurer sells a single financing contract to an EPS that funds the financing agreement by distributing smaller FABS parts to institutional investors. In addition, at least two types of FABS are designed for short-term investors, such as leading money market investment funds: Extendible Funding Agreement-backed Notes (XFABN) and Funding Agreement-backed commercial paper (FABCP). These securities have a much shorter term than the underlying financing agreement, which typically has a term of about ten years. XFABN often has an initial duration of 397 days, but each month gives investors the option to gradually extend the duration of their bonds by one month. Fabcp is a fixed-term contract of one week to six months.3 Depending on the offering, the “Mutual Of Omaha” agreement allows termination and withdrawal by the issuer or investor for any reason, but the terms of the contract require that 30 to 90 days before the last day of the interest period be terminated by the issuer or investor. The proceeds of financing contracts are similar to capital guarantee funds or guaranteed investment contracts, both instruments also promising a fixed rate of return at low or no risk for the investor. In other words, guarantee funds can generally be invested without risk of loss and are generally considered risk-free.
However, like certificates of deposit or pension certificates, financing agreements generally offer only modest returns. 1. Another advantage is that financing agreements do not increase the leverage of insurers, as these are legal insurance contracts. Return to text Mutual of Omaha offers a platform for financing agreement products available to institutional investors. These financing agreements are marketed as conservative interest-rate products with regular income distributions and are offered on fixed or variable terms. The deposited funds are held as part of Omaha Life`s general life insurance account. Life insurers reacted to the collapse of the fabs market by issuing FABN in the shorter term, As shown in Figure 3, and FABCP , Figure 5, as well as by the direct allocation of financing agreements to the Federal Home Loan Banks (FHLB).7 As in the case of FABS, insurers earn a spread by investing the proceeds of financing agreements placed with FHLb in a portfolio of real estate and non-real estate assets with a higher return on the higher than financing costs. As shown in Chart 7, the increase in FHLB`s advances during the financial crisis is broadly equivalent to that of the outstanding FABS. While FHLB played a special role in providing these insurers with an effective liquidity backstop during the financial crisis, FHLB`s advances have since become a more widespread source of wholesale financing for many life insurers.8 In the second half of the 2000s, U.S. life insurers accelerated their issuance of XFABN, billed as a blue line in Figure 4. As with other short-term financing markets, such as commercial paper and asset-backed repo markets, the XFABN market collapsed in the summer of 2007, when institutional investors suddenly stopped expanding their XFABN.