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Asset-Backed Securities

Last Updated 6/24/20

Issue: Asset-backed securities (ABS) are bonds backed by various types of financial assets.Typically these assets consist of receivables other than mortgage loans, such as credit card receivables, auto loans, and student loans.

Overview: Asset-backed securities evolved out of the mortgage-backed securities (MBS) market. Compared with MBS, asset-backed issues have been relatively unaffected by swings in interest rates. The reason is that the car loans and other loans backing ABS have shorter maturities than mortgages, and therefore people are less likely to refinance when interest rates fall.

Unlike conventional corporate bonds, which are usually unsecured, ABS benefit from credit enhancement. Credit enhancement takes place when a security's credit quality is raised above that of the sponsor's unsecured debt or that of the underlying asset pool. A variety of internal and/or external credit supports are employed to increase the likelihood that ABS investors will receive the cash flows to which they are entitled.

Key to the health of the overall ABS market is the performance of the consumer sector. The three largest consumer ABS asset classes - auto loans, credit card receivables, and student loans - define, to a large degree, the tone and direction of the non-mortgage ABS market.

.Asset-backed securities have proven over the years to be stable investments attracting many investors, among them insurance companies.

U.S. consumer ABS credit quality will likely remain stable in 2020 due to low interest rates and low unemployment supporting performance. Given that the majority of ABS assets are fixed-rate, the direct effect of any potential federal reserve interest rate increases will be limited on existing ABS securities. However, increasing rates may indirectly affect newly issued ABS asset performance by making new credit and refinance options more costly for consumers. A surge in interest rates may weigh heavily on borrowers' debt service capacity and consumer asset performance.

Status: ABS securities have historically been captured in scope of SSAP No. 43R—Loan-backed and Structured Securities. In 2020, the Statutory Accounting Principles (E) Working Group and the Valuation of Securities (E) Task Force are reviewing different structures to assess appropriate accounting and reporting treatment and whether the securities shall be filing exempt.

Committees Active on This Topic

Additional Resources

Analysis of Securitized Asset Liquidity
Financial Industry Regulatory Authority (FINRA) Office of the Chief Economist

Research Quarterly, Third Quarter 2017
Securities Industry and Financial Markets Association (SIFMA)

NAIC Capital Markets Special Report: U.S. Insurance Industry Cash and Invested Assets at Year-End 2016
August 24, 2017


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