Guaranteed investment contract

Last updated

A guaranteed investment contract (GIC) is a contract that guarantees repayment of principal and a fixed or floating interest rate for a predetermined period of time. Guaranteed investment contracts are typically issued by life insurance companies qualified for favorable tax status under the Internal Revenue Code (for example, 401(k) plans). A GIC is used primarily as a vehicle that yields a higher return than a savings account or United States Treasury securities and GICs are often used as investments for stable value funds. [1] GICs are sometimes referred to as funding agreements, although this term is often reserved for contracts sold to non-qualified institutions.[ citation needed ]

Contents

Example: Funds obtained through a municipal bond issuance will generally take time to be drawn down. Depositing the bond proceeds in a GIC gives the bond issuer the liquidity of having the funds available while earning a higher rate of return than it would earn in a money market account. GICs are considered safe vehicles since most insurance companies offering them are rated in the AA to AAA range.[ citation needed ]

The term "GIC" is sometimes used in the context of guaranteed investment agreements, or GIAs. [2] [3] [4]

History

As of 1990, a large amount of people's 401k retirement money had been invested into GICs. However, when life insurance companies started failing, people began to lose their faith in GICs as a product. For example, Executive Life Insurance Company had some junk bond problems in 1990, and people started redeeming their GICs. So many people redeemed Executive GICs that it couldn't pay all that it owed. It was 'failed' and seized by the government. Investors who had bought GICs, such as the Unisys employee fund, found that their money was frozen. This resulted in a lawsuit against Unisys. [5] [6]

In 1995 the New York State Insurance Department enabled the 'monoline' municipal-bond insurance companies to write insurance on GICs. Thus if the GIC issuer failed, the monoline insurer could pay back investors instead. Insured GICs were called "wrapped" GICs. [7] [8]

In the late 2000s, AIG, a holding company and not an insurance company, was bailed out by the federal government to the tune of over a hundred billion dollars. The NY Times reported that some of the government money (at least 9 billion dollars) was used to pay out on "Guaranteed Investment Agreement" contracts that AIG had sold to investors. [9] [10]

In 2010 many GIC sellers were sued by counties such as Los Angeles and Oakland over alleged price fixing regarding GICs. Many large banks and other companies were named as 'co-conspirators' [11] [12]

See also

Notes

  1. ↑ Lemke and Lins, ERISA for Money Managers, §2:141 (Thomson West, 2015-2016 ed.).
  2. ↑ Glossary of Terms Archived 2010-03-08 at the Wayback Machine , Texas State Affordable Housing Corporation, accessed 2010 5 1
  3. ↑ Reinvestment Products, Sound Capital Management, 2009, accessed 2010 5 1
  4. ↑ Primoris Offering Circular, pg 61, 2007 Nov, Irish Stock Exchange, accessed 2010 5 1
  5. ↑ Redress For Broken Nest Eggs, MARGARET CRANE, NY Times, November 3, 1996, accessed 2010 5 1
  6. ↑ Berg, Eric N. (1991-09-03). "Worry Over Retirement Funds". The New York Times. ISSN   0362-4331 . Retrieved 2023-01-04.
  7. ↑ Circular Letter No. 13 (1995) Archived 2011-07-19 at the Wayback Machine , August 17, 1995, STATE OF NEW YORK INSURANCE DEPARTMENT, accessed 2010 5 1
  8. ↑ Quint, Michael (1994-05-16). "Big Insurers In Struggle Over Ratings". The New York Times. ISSN   0362-4331 . Retrieved 2023-01-04.
  9. ↑ This involved contracts used for collateral with credit defaults swaps (CDS) written by AIG Inc. that were in default. As a holding company, AIG Inc. is a separate, federally regulated legal entity that is distinct and apart from its subsidiary insurers. AIG insurance companies were always solvent with capacity to pay insurance coverages, including contract holders. And AIG Inc. would not have been allowed to use assets of insurance subsidiaries without the approval of insurance regulators, per Sandy Praeger, president of the National Association of Insurance Commissioners (NAIC). Where did AIG's cash go? By MARY WILLIAMS WALSH, NY Times, October 29, 2008, accessed 2010 5 1
  10. ↑ AIG has posted information about some of the uses of the bailout money at its website, Related Resources, at aig.com Archived 2009-06-08 at the Wayback Machine . This includes a PDF listing of GIAs paid out to various parties between 9/16/08 and 12/31/08. These parties include municipalities, hospitals, states, foreign entities, etc. The total is $9,500,000,000 (9.5 billion) dollars. Please see: AIG. "Attachment C – Payments Under Guaranteed Investment Agreements" (PDF). Retrieved 2010-05-01.
  11. ↑ Over a Dozen Firms Snared in Probe of Muni Market, 2010 3 27, Chad Bray, Wall Street Journal, accessed 2010 5 1
  12. ↑ Lawsuit alleges price-fixing scam, 2010 Apr 30, Andrew S. Ross, sfgate, accessed 2010 5 1

Related Research Articles

<span class="mw-page-title-main">Credit default swap</span> Financial swap agreement in case of default

A credit default swap (CDS) is a financial swap agreement that the seller of the CDS will compensate the buyer in the event of a debt default or other credit event. That is, the seller of the CDS insures the buyer against some reference asset defaulting. The buyer of the CDS makes a series of payments to the seller and, in exchange, may expect to receive a payoff if the asset defaults.

<span class="mw-page-title-main">Goldman Sachs</span> American investment bank

The Goldman Sachs Group, Inc. is an American multinational investment bank and financial services company. Founded in 1869, Goldman Sachs is headquartered in Lower Manhattan in New York City, with regional headquarters in many international financial centers. Goldman Sachs is the second-largest investment bank in the world by revenue and is ranked 55th on the Fortune 500 list of the largest United States corporations by total revenue. In the Forbes Global 2000 of 2024, Goldman Sachs ranked 23rd. It is considered a systemically important financial institution by the Financial Stability Board.

<span class="mw-page-title-main">American International Group</span> American multinational finance and insurance corporation

American International Group, Inc. (AIG) is an American multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions. As of 2023, AIG employed 25,200 people. The company operates through three core businesses: general insurance, life & retirement, and a standalone technology-enabled subsidiary. General Insurance includes Commercial, Personal Insurance, U.S. and International field operations. Life & Retirement includes Group Retirement, Individual Retirement, Life, and Institutional Markets. AIG is the title sponsor of the AIG Women's Open golf tournament. In 2023, for the sixth consecutive year, DiversityInc named AIG among the Top 50 Companies for Diversity list.

Fixed income refers to any type of investment under which the borrower or issuer is obliged to make payments of a fixed amount on a fixed schedule. For example, the borrower may have to pay interest at a fixed rate once a year and repay the principal amount on maturity. Fixed-income securities can be contrasted with equity securities that create no obligation to pay dividends or any other form of income. Bonds carry a level of legal protections for investors that equity securities do not: in the event of a bankruptcy, bond holders would be repaid after liquidation of assets, whereas shareholders with stock often receive nothing.

Variable universal life insurance is a type of life insurance that builds a cash value. In a VUL, the cash value can be invested in a wide variety of separate accounts, similar to mutual funds, and the choice of which of the available separate accounts to use is entirely up to the contract owner. The 'variable' component in the name refers to this ability to invest in separate accounts whose values vary—they vary because they are invested in stock and/or bond markets. The 'universal' component in the name refers to the flexibility the owner has in making premium payments. The premiums can vary from nothing in a given month up to maximums defined by the Internal Revenue Code for life insurance. This flexibility is in contrast to whole life insurance that has fixed premium payments that typically cannot be missed without lapsing the policy.

A money market fund is an open-end mutual fund that invests in short-term debt securities such as US Treasury bills and commercial paper. Money market funds are managed with the goal of maintaining a highly stable asset value through liquid investments, while paying income to investors in the form of dividends. Although they are not insured against loss, actual losses have been quite rare in practice.

<span class="mw-page-title-main">Prudential Financial</span> American life insurance company

Prudential Financial, Inc. is an American Fortune Global 500 and Fortune 500 company whose subsidiaries provide insurance, retirement planning, investment management, and other products and services to both retail and institutional customers throughout the United States and in over 40 other countries. In 2019, Prudential was the largest insurance provider in the United States with $815.1 billion in total assets.

Unitised insurance funds or unit-linked insurance funds are a form of collective investment offered life assurance policies.

<span class="mw-page-title-main">Catastrophe bond</span> Risk-linked securities

Catastrophe bonds are a subset of insurance-linked securities (ILS) that transfer a specified set of risks from a sponsor to investors. They were created and first used in the mid-1990s in the aftermath of Hurricane Andrew and the Northridge earthquake.

In the United States, an annuity is a financial product which offers tax-deferred growth and which usually offers benefits such as an income for life. Typically these are offered as structured (insurance) products that each state approves and regulates in which case they are designed using a mortality table and mainly guaranteed by a life insurer. There are many different varieties of annuities sold by carriers. In a typical scenario, an investor will make a single cash premium to own an annuity. After the policy is issued the owner may elect to annuitize the contract for a chosen period of time. This process is called annuitization and can also provide a predictable, guaranteed stream of future income during retirement until the death of the annuitant. Alternatively, an investor can defer annuitizing their contract to get larger payments later, hedge long-term care cost increases, or maximize a lump sum death benefit for a named beneficiary.

<span class="mw-page-title-main">MBIA</span> American financial services company

MBIA Inc. is an American financial services company. It was founded in 1973 as the Municipal Bond Insurance Association. It is headquartered in Purchase, New York, and as of January 1, 2015 had approximately 180 employees. MBIA is the largest bond insurer.

The subprime mortgage crisis impact timeline lists dates relevant to the creation of a United States housing bubble and the 2005 housing bubble burst and the subprime mortgage crisis which developed during 2007 and 2008. It includes United States enactment of government laws and regulations, as well as public and private actions which affected the housing industry and related banking and investment activity. It also notes details of important incidents in the United States, such as bankruptcies and takeovers, and information and statistics about relevant trends. For more information on reverberations of this crisis throughout the global financial system see 2007–2008 financial crisis.

Bond insurance, also known as "financial guaranty insurance", is a type of insurance whereby an insurance company guarantees scheduled payments of interest and principal on a bond or other security in the event of a payment default by the issuer of the bond or security. It is a form of "credit enhancement" that generally results in the rating of the insured security being the higher of (i) the claims-paying rating of the insurer or (ii) the rating the bond would have without insurance.

A synthetic CDO is a variation of a CDO that generally uses credit default swaps and other derivatives to obtain its investment goals. As such, it is a complex derivative financial security sometimes described as a bet on the performance of other mortgage products, rather than a real mortgage security. The value and payment stream of a synthetic CDO is derived not from cash assets, like mortgages or credit card payments – as in the case of a regular or "cash" CDO—but from premiums paying for credit default swap "insurance" on the possibility of default of some defined set of "reference" securities—based on cash assets. The insurance-buying "counterparties" may own the "reference" securities and be managing the risk of their default, or may be speculators who've calculated that the securities will default.

This article provides background information regarding the subprime mortgage crisis. It discusses subprime lending, foreclosures, risk types, and mechanisms through which various entities involved were affected by the crisis.

The U.S. central banking system, the Federal Reserve, in partnership with central banks around the world, took several steps to address the subprime mortgage crisis. Federal Reserve Chairman Ben Bernanke stated in early 2008: "Broadly, the Federal Reserve’s response has followed two tracks: efforts to support market liquidity and functioning and the pursuit of our macroeconomic objectives through monetary policy." A 2011 study by the Government Accountability Office found that "on numerous occasions in 2008 and 2009, the Federal Reserve Board invoked emergency authority under the Federal Reserve Act of 1913 to authorize new broad-based programs and financial assistance to individual institutions to stabilize financial markets. Loans outstanding for the emergency programs peaked at more than $1 trillion in late 2008."

This article is a subordinate article to the subprime mortgage crisis. It covers some of the miscellaneous effects of the crisis in more detail, to preserve the flow of the main page.

The Subprime mortgage crisis solutions debate discusses various actions and proposals by economists, government officials, journalists, and business leaders to address the subprime mortgage crisis and broader 2007–2008 financial crisis.

A with-profits policy (Commonwealth) or participating policy (U.S.) is an insurance contract that participates in the profits of a life insurance company. The company is often a mutual life insurance company, or had been one when it began its with-profits product line. Similar arrangements are found in other countries such as those in continental Europe.

A stable value fund is a type of investment available in 401(k) plans and other defined contribution plans as well as some 529 or tuition assistance plans. Stable value funds are often made available in these plans under a name that intends to describe the nature of the fund. They offer principal preservation, predictable returns, and a rate higher than similar options without proportionately increasing risk. The funds are structured in various ways, but in general they are composed of high quality, diversified fixed income portfolios that are protected against interest rate volatility by contracts from banks and insurance companies. For example, a stable value fund may hold highly rated government or corporate debt, asset-backed securities, residential and commercial mortgage-backed securities, and cash equivalents. Stable value funds are designed to preserve principal while providing steady, positive returns, and are considered one of the lowest risk investment options offered in 401(k) plans. Stable value funds have recently been returning an annualized average of 2.72% as of October 2014, higher than the 0.08% offered by money-market funds, and are offered in 165,000 retirement plans.

This page is based on this Wikipedia article
Text is available under the CC BY-SA 4.0 license; additional terms may apply.
Images, videos and audio are available under their respective licenses.