Breakingviews - Private credit dives back into FABulous funding

Reuters

12-06-2025

NEW YORK, June 11 (Reuters Breakingviews) - Insurance is becoming the engine of the $17 trillion private asset management industry. For years, buyout barons funded deals with checks from pension funds or college endowments. An M&A slowdown, middling returns, and the chance to muscle banks aside has turbo-charged a push into lending by asset managers like Apollo Global Management (APO.N), opens new tab. Their fast-expanding private credit arms increasingly draw funding from the insurance industry. Insurers, in turn, are raising cash by returning to a pre-financial crisis favorite: Funding Agreement-Backed Notes (FABNs).
By their nature, insurance companies have cash to spare. They collect premiums and invest the proceeds until a policy pays out. Their iron law is that assets and liabilities should have the same duration. If an insurer sells an annuity promising 5% interest that begins paying out in five years, it must accumulate assets which mature over the same timeframe while generating sufficient income to more than cover that payment. Private credit offers a neat fit: IOUs pay down predictably and offer a range of different returns tuned to risk.
This pairing is particularly appealing for asset-based finance, industry-speak for loans backed by anything from cars to Picassos. Lenders can package such debt into investment-grade bonds, which neatly slot into insurers' balance sheets.
By the end of 2024, U.S. insurers had plunged roughly $700 billion, or 13% of their total bond holdings, into asset-backed and other structured securities, according, opens new tab to the National Association of Insurance Commissioners. Apollo reckons, opens new tab asset-backed finance is a $20 trillion opportunity, equivalent to almost 10 times the private credit industry's current $2.2 trillion hoard, per PitchBook.
The iron law runs both ways, though. For every dollar invested in asset-backed finance, there must be a corresponding liability. That is why insurers like Apollo's Athene subsidiary, KKR-owned Global Atlantic and their rivals have rushed to sell annuities to policyholders. Annual retail issuance exploded from the roughly $200 billion common prior to the pandemic to $434 billion in 2024, according, opens new tab to industry association LIMRA. Even this, though, is not enough.
Enter FABNs. The notes dispense with the need for laborious marketing or managing the risk – common to annuities – that policyholders cash them in ahead of schedule. Instead, FABNs allow insurers to offer a guaranteed return to big investors like PIMCO or Janus Henderson.
Here's how it works, opens new tab: An insurer sets up a special purpose vehicle – effectively a box - which sells bonds to investors. The insurer drops a funding agreement into the box and receives the cash from the bonds. This is an annuity, but on a much larger scale - frequently $500 million or more. The insurer makes payments to satisfy the funding agreement, which in turn flow to the bondholders.
Excluding various other flavors of funding agreements, there were some $191 billion of FABNs outstanding in the U.S. as of the end of 2024, according to Federal Reserve data, opens new tab, surpassing the previous 2008 peak by 68%.
The notes have several advantages. Despite blurring the line between debt and annuities, ratings agencies treat them as operating rather than financial leverage. Because the securities are issued by an insurer's operating company, they rank senior to holding company debt. That allows them to win superior ratings. FABNs issued by Athene enjoy an A+ label from Fitch, two notches above the grade awarded to its holding company. Some 28% of issuance rated by Fitch in 2024 won the highest triple-A rating.
This wheeze is not limitless. AM Best and Moody's raise an eyebrow if an insurer's FABNs top 30% of the liabilities across its operating companies. Fitch begins looking askance if the securities top 20% of an insurer's general account. Athene's funding agreements reached 21% of its net reserve liabilities in the first quarter of 2025, according to company filings, opens new tab, though that figure includes various other types of liabilities.
But the market is not just racy upstarts. While Athene was 2024's largest issuer, at $11.2 billion, some of the oldest firms around pioneered the market. New York Life issued roughly $10 billion of notes rated by Fitch last year. MetLife and Pacific Life Insurance also joined in.
One concern is that FABNs have caused trouble before. Back in 2001 insurers began issuing extendible FABNs, which allowed investors to redeem the notes after roughly a year. After reaching a peak of over $26 billion outstanding in 2007, investors rushed for the exits during the financial crisis, draining liquidity from insurers. This a textbook example of what investors call 'rollover risk', where an issuer must find fresh funding for longer-dated assets.
Extendible FABNs no longer exist. Some 66% of issuance thus far in 2025 matures in three to five years, according to figures from Deutsche Bank aggregated using Bloomberg data. However, short-term financing remains a temptation. Some insurers issue Funding Agreement-Backed Commercial Paper with maturities measured in days. Fitch rates programs from Brighthouse Financial, MetLife, Jackson National, Pacific Life and Protective Life. FABCP outstanding crept up to about $11 billion at the end of 2024. When designating MetLife a systemically important financial institution in 2014, U.S. regulators specifically pointed, opens new tab to rollover risk from FABNs and FABCP.
Even if insurers remain disciplined in matching the duration of assets and liabilities, there are other risks. For one, private credit's rapid expansion has not yet been tested by a severe downturn. If assets go sour, insurers are on the hook for the losses. The opacity of private loans flowing into their balance sheets can be bewildering to outsiders; a high-profile blow-up could make buyers of FABNs leery, triggering a funding crunch.
The notes are, of course, one of multiple ways in which insurers gather liabilities, including annuity sales or reinsurance deals. But they are becoming very large and are uniquely abstracted from insurers' core purpose of serving policyholders. Last year, Apollo's Athene issued notes equivalent to 31% of its retail annuity sales. The market has a habit of following the firm led by Marc Rowan. Apollo, though, has advantages over rivals: it can directly make the kinds of loans that will be matched with Athene's liabilities, while its Atlas SP Partners unit advises others on creating yet more asset-backed securities.
FABNs could enable an over-eager insurer to chase rapid growth without a clear grasp of its pipeline of assets. A spree-fueled run funding dicey credits could rebound on others, too. Even the highest-octane engines can backfire.
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