By Randy Myers
Wrap capacity in the stable value industry finally appears to be expanding.
Wrap contracts guarantee book value withdrawal rights for investors in stable value products. When the credit markets froze in 2008, the banks and insurers that issue wrap contracts began to reassess the risks embedded in that business. In many cases, they stopped writing new contracts as they analyzed the market to reassess risks.
Today, wrap capacity remains far more constrained than it was prior to the credit crunch. But as participants at the SVIA’s 2010 Spring Seminar learned, three insurers-Aviva plc, Prudential Financial and Mutual of Omaha-have recently brought new capacity to the market and are writing new stable value business.
Aviva, which is wholly new to the stable value market, is offering a bundled synthetic GIC in which it both manages the underlying assets and provides the wrap contract. “We felt comfortable coming out with this structure,” Eric Hasenauer, managing director and head of sales for the company’s Aviva Investors North America Inc. subsidiary, told seminar participants. “A lot of capacity generated today comes in the form of bundled offerings, and we thought this would be attractive to the market given the fact that plan sponsors can custody the underlying assets.”
Hasenauer noted that plan sponsors also benefit from the synthetic GIC structure because it requires issuers to hold less capital than a traditional GIC would. Those lower internal expenses can be passed along as savings to plan sponsors, Hasenauer said, and also can allow for greater flexibility in setting investment guidelines.
Hasenauer said the higher fees that wrap contracts are commanding in the wake of the credit crisis helped convince Aviva to expand into the stable value marketplace. Aviva entered the market with $10 billion in wrap capacity, he said, and has “billions more earmarked behind that” to expand in the future.
One of the biggest internal challenges to launching the business, he noted, was simply educating other decision-makers within Aviva about the market’s risks and opportunities. Another challenge, he said, was learning to understand the regulatory environment in each state where the company wishes to operate. Aviva hired third-party experts to help it with the legal and administrative aspects of launching the business, he said, while building its own internal staff and infrastructure.
Like Aviva, Mutual of Omaha recently launched a synthetic GIC business, although in its case it is not managing the underlying portfolio internally but instead is working with third-party asset managers. The company was already a provider of traditional GICs and funding agreements. The
synthetic GIC business, said Mutual of Omaha’s Marty Fleishman, vice president for retirement plans, represents new wrap capacity the company has brought to the market.
“We are writing far bigger wrap contracts than we ever did in traditional GICs,” he confirmed after the seminar. “But we are not cutting back on traditional GICs. We don’t see this as a replacement for that business, but a supplement to it.”
Fleishman, who joined Mutual of Omaha in April 2009 to launch the stable value wrap contract business, said the company currently offers under $10 billion in wrap capacity, but added that he is hopeful of being able to offer more as the business proves itself. He conceded that the company had developed a contract with conservative terms and conditions that do not appeal to all stable value managers, but are attractive to some. As of mid-April 2010, the company had contracts in place with two managers and was in advanced negotiations with three more.
Prudential has had a long history of operating in the stable value marketplace, beginning by offering traditional GICs and later introducing separate account and synthetic GICs as part of its full-service retirement plan administration platform.
About a year ago, the company began offering its separate account and synthetic GIC businesses as stand-alone products to stable value managers, bringing additional capacity to the wrap marketplace.
William McCloskey, vice president with the company’s Prudential Retirement unit, said Prudential’s total book of wrap business now exceeds $10 billion and is “not yet within sight” of its upper bounds. Since expanding its role in the stable value market, he said, the company has put about half a dozen new wrap contracts in place.
“McCloskey added that Prudential had taken its product through a “de-risking process” that involved creating investment strategies and contract provisions suitable for the current conservative investment climate.
“My feeling,” he said, “is that there’s more of that that could be done to bring further capacity back into the stable value market.”