Some major life insurers have stepped up their issuance of a specialized type of debt instrument that had created a liquidity crunch for some insurance companies during the financial crisis.

 

Seven U.S. life insurers, among them Principal Financial Group Inc., collectively have issued significantly more Funding Agreement Note Issuance Program (FANIP) debt year-to-date than in 2013, according to a "Special Comment" report issued Wednesday by Moody's Investors Service Inc., LifeHealthPro reported.  

 

FANIPs are a debt funding source for insurers' institutional spread business, where proceeds are invested in fixed-income assets to match the liability cash flows and earn an adequate profit spread - the difference between investment income earned and interest paid on the debt.

 

"Having been stagnant since the financial crisis, these funding agreement instruments are showing signs of life," Rokhaya Cisse, a Moody's analyst and author of the report, said in a release"Through April 2014, issuance is up by approximately 56 percent to $8.8 billion year over year."

 

MetLife Inc., the largest user of FANIPs of the seven companies cited in the report, issued nearly $5.3 billion of that amount, compared with $6.4 billion the insurer issued in all of 2013, according to a recap by LifeHealthPro. Principal has issued $325 million in FANIPs year-to-date, compared with total issuance of $1.275 billion in 2013.

 

John Egan, Principal's vice president of investor relations, said in an emailed statement to the Business Record that "during the financial crisis, we purposely de-risked our exposure to these products. While we currently do not plan to increase our exposure to this business, we will continue to monitor the rate and spread environment." 

 

Moody's said it views the increase in FANIP issuances as "credit negative" because "they present liquidity and asset liability management risks that can emerge during capital markets disruptions, as seen during the financial crisis of 2008-2009." During that period, investors' desire for liquidity prompted them to put back to insurers certain FANIPs, which left insurers scrambling to pay off these contracts, according to the Moody's report.