Fitch: FA-Backed Notes Gain Significant Ground Since '97

Business Wire, March 8, 2005

CHICAGO -- In 2004, more than $31 billion of funding agreement-backed notes were issued by the life insurance industry, bringing the amount issued since 1997 to more than $135 billion.

Given the unprecedented growth of these insurance products -- and FA-backed notes' potential for the future -- Fitch, on March 3, released a report, "FA-Backed Notes: From Zero to $135 Billion in Eight Years," which discusses the development of FA-backed note product, the characteristics of the FA-backed note market, the basic product structure, Fitch's rating methodology, and a view of the credit characteristics of this business line.

FA-backed note programs are a subset of the broader institutional investment products segment that includes funding agreements, general account GICs, separate account GICs, synthetic GICs, short-term funding agreements, and securities lending programs. Initially, issuers were domiciled offshore and sold only into foreign markets. Today, issuers have moved on-shore and sell to a broad range of foreign and domestic institutional and retail investors.

"Fitch views FA-backed notes and other institutional investment products as having lower credit quality than many of the products sold by life insurers," said Julie Burke, Managing Director, Fitch Ratings. "These products are generally narrow-margined and commodity-like where rating, price, term, and capacity are the key drivers of sales. Therefore, insurers cannot develop a sustainable advantage versus other writers."

Even though institutional investment products fall at the lower end of Fitch's credit quality continuum, Fitch believes these insurance products have a place in a highly rated insurance company's product portfolio. To this end, Fitch is most comfortable with these products when the following five characteristics are evident:

--In-force is modest in size;

--Business is written opportunistically;

--Insurer has credit, duration, and liquidity risk management expertise;

--Insurer has large diverse business lines;

--Insurer has significant financial flexibility.

The Fitch Ratings report "FA-Backed Notes: From Zero to $135 Billion in Eight Years" is now available on the Fitch Ratings web site at www.fitchratings.com.