Insurer-Backed Notes Reshape Private Credit Funding Landscape

Led by Athene, Apollo Global Management’s in‑house insurer, funding agreement‑backed notes are re-emerging as a primary funding source for private credit.

Part of a class of offerings known as institutional spread products, the structure is, at its core, a ratings arbitrage.

A life insurer issues a funding agreement to a special purpose vehicle that, in turn, sells fixed return notes to institutional buyers (large asset managers like PIMCO or Janus Henderson), receiving cash proceeds from the sale.

The issuer then invests the proceeds and earns the spread differential between the cost of the note and the yield on its invested assets. In cases where there’s an insurer-sponsor relationship, like with Apollo and Athene, the insurer invests that cash with the sponsor.

While the funding agreement is an unsecured obligation of the insurer, ratings agencies view the agreements as having a senior claim on assets that is roughly equivalent to that of an individual policyholder.

In other words, the liability is treated like sales of additional policies (which receive a higher rating based on the issuer’s ability to pay), rather than a standard corporate debt issuance (based on financial leverage and typically lower rated).

Offering a simpler explanation on the firm’s latest earnings update, Apollo chief financial officer Martin Kelly called funding agreements a source of “really cheap financing”.

Through the first half of the year, Athene raised roughly $23 billion and reported about $64 billion of funding agreements as of June, almost double the $34 billion a year earlier, investor materials show.

For sponsors with insurers funding their private credit platforms, the emergence of asset-backed finance has created a much larger opportunity set for new originations, which has begun to outpace the funding available from policy sales. That creates new unmet demand for stable, duration-matched liabilities.

FABN issuance is helping to fill the gap, hitting $58 billion in 2024 after growing 70 percent from 2023. This year is on track for another leg up, with $43.2 billion placed across 24 issuers through June, according to Fitch.

While Athene was 2024’s largest issuer at $11.2 billion, New York Life sold about $10 billion of notes, and MetLife and Pacific Life are also active. On the sponsor‑backed side, KKR’s Global Atlantic and Brookfield’s American National have each expanded their programs.

FABNs aren’t a new invention.

The arrangement became popular in the early 2000s, and outstanding notes previously peaked in 2007. Those FABNs were a slightly different variety known as extendible, which allowed investors to redeem the notes after the first year.

When the financial crisis hit, redemptions jumped and drained insurer liquidity (AIG was one of the largest issuers at the time).

Most of today’s issuance is fixed term, generally three to five years, and avoids similar redemption risk.

Still, issuance is often done in large chunks, which means that obligations can come due in lumpy windows. The fundamental risk is a scenario where the private credit assets backing these liabilities become distressed at the same time a large batch of the notes mature.

Moody’s analyst Vincent Del Gatto tells the Financial Times that the agency’s “biggest concern” is not the notes per se, but the growth in private credit investments used to pay them off.

“What happens if the assets you had originally booked as backing these liabilities don’t come to fruition?” Del Gatto said. “You’re on the hook to either raise funds somewhere else . . . or you just start liquidating other assets.”