By Randy Myers
For the second straight year, the stable value industry has the capacity to take on a significant amount of new business—a welcome turnaround from conditions that prevailed in the immediate aftermath of the 2008 credit crisis.
In 2012, the industry absorbed $66 billion in new business, according to data compiled by LIMRA, an insurance industry trade group, and the SVIA, slightly outpacing the $60 billion in new capacity that a poll of stable value providers had indicated would be available.
This year, a survey by the SVIA found that providers expect to have net new capacity of $103 billion in 2013, including $15 billion from new entrants into the marketplace. To put those numbers into perspective, the SVIA calculates that total assets in stable value funds reached $701 billion last year.
Speaking at the 2013 SVIA Spring Seminar, Marijn Smit, president of Transamerica Stable Value Solutions, said the March 2013 survey drew responses from 27 of the 30 stable value issuers polled, including six banks. Of the 27 who did respond, 23 were existing issuers, and four were potential new entrants to the market, including three insurance companies and one bank. The existing issuers had $435 billion in stable value balances as of December 31, 2012.
Whether the industry is able to put all its available capacity to work will depend on demand from retirement plan sponsors for stable value funds, of course, but it also could be impacted by market developments. The issues most likely to inhibit providers from putting their capacity to use, survey respondents said, would be the absence of an equity wash rule in plans that have competing funds, funds with market-value-to-book-value ratios below par, and unattractive duration limits on funds and their underlying investments.
Phil Maffei, a senior director with TIAA-CREF, told Spring Seminar participants that his company has added capacity by providing a bundled offering, meaning that TIAA-CREF not only provides the wrap contract but also manages, through an affiliate, the underlying investment portfolio. It took in its first deposit in May 2012.
Maffei said the single biggest issue TIAA-CREF had to overcome in entering the wrap side of the stable value business was simply coming to grips with moving from spread-based products—i.e., traditional GICs—to a fee-based product.
Jessica Mohan, director of the stable value product group for Bank of Tokyo Mitsubishi, UFJ, Ltd., said her company is in the second year of a three-year commitment to provide $30 billion of capacity to the stable value marketplace, having done just shy of $9 billion of business in the first year. “We have a mandate to grow to $18 billion by the end of September, and I think we’ll make it,” she said. “I also think our ability to grow to our ultimate level is achievable.”
William McCloskey, vice president of the stable value market group at Prudential Financial, said his firm’s total stable value capacity broached the $100 billion mark by year-end 2012, including $60 billion in its institutional, or wrap, business. “We remain open with capacity today,” he said, “although there are obviously ongoing discussions inside Prudential about how far we should go.”
McCloskey said Prudential has been “very thoughtful about the type of business we’ve done, even though we’ve grown very rapidly.”
More broadly, McCloskey said the additional capacity now available in the stable value market is healthy, creating more competition and allowing stable value managers to be more thoughtful and deliberate about meeting their fiduciary responsibilities. “It’s also allowing plan sponsors to feel that the overall stable value market is not quite so out of balance,” he said. “It’s not in a state of turmoil; that’s a thing of the past. The market has returned to a much healthier place.”
Nick Gage, senior director with stable value manager Galliard Capital Management, also endorsed the competition brought on by more capacity, but said he still sees the current environment as an issuer’s market. “They (issuers) all have their unique requirements,” he said. “I think the challenge is for managers to find the right capacity.”
That’s particularly true for pooled fund managers, said Tim Stumpff, president of Morley Financial Services, noting that of all the estimated available new capacity this year, only 6 percent is earmarked for pooled funds. By contrast, 77 percent is earmarked for synthetic GIC funds (excluding pooled synthetic GICs). Those numbers, he said, led him to wonder if there is too much similar capacity chasing too few funds.
The panelists generally agreed that the increased capacity may make stable value issuers slightly more flexible about contract terms, but that they do not expect any dramatic changes.