Funding Agreements Insurance Companies

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 Securities are marketed as SPV-only securities and are offered to investors and potential investors. They are not represented, marketed, designated or offered to potential investors as a type of insurance or pension contract, financing contract or other obligation of an insurance company. Each investor is informed that the only source of payment under the securities will be the SPV and its assets. 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. Mutual of Omaha offers a platform for financing contractual 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. An insurance company (“insurer”) awards one or more financing contracts to a special purpose vehicle (“SPV”), usually organized as a trust or LLC. Funding agreements will essentially support certain securities (“securities”) that will be issued by the VPS. This note describes the new data on securities covered by a financing contract (FABS) that are provided under the Enhanced Financial Accounts (EFA) initiative. As described in Holmquist and Perozek (2016), the U.S. financial accounts report the total amount of FABS`s outstanding assets at a quarterly rate. This EFA project expands financial account data by providing daily data to different types of FABS, which vary depending on duration and integrated optionality. The more detailed data presented in this EFA project provide a clearer picture of developments in this important financing market, including the start-up of a segment of the FABS market from the summer of 2007 (Foley-Fisher, Narajabad and Verani 2015). The project thus promotes the objectives of the EFA initiative – described in Gallin and Smith (2014) – in order to provide a more detailed and frequent picture of financial intermediation in the United States. In the second half of the 2000s, U.S. life insurers accelerated their issuance of XFABN 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.