America is growing old. The first of the so called baby boomer generation, the 76 million Americans born between 1945 and 1964, are about to hit retirement. And the life insurance market has never seen such competition for their nest eggs. As more and more companies fail to provide employee pension plans, it is the life insurance industry which has come to dominate the retirement market. The MTN market has become the new battle ground for these life insurance giants such as SunAmerica. And they are fighting it out using GIC-backed (guaranteed investment contract)programmes. In the last year, five insurance companies joined SunAmerica in signing GIC-backed programmes: Jackson National Life, John Hancock, Pacific Life and Principal Life. It is rumoured that Transamerica, currently in takeover talks with Aegon, will shortly join this list. Mike Rollings, principal, Morgan Stanley (MS), New York, in charge of MS's GIC issuers in America explains why these borrowers are entering the MTN markets at such a rate: "First, the GIC market in America has contracted significantly over the past few years. Second, GICs and funding agreements have primarily been issued in the one to five year sector. And third, the ability to expand and diversify the investor base is extremely attractive." Not only was funding in America becoming increasingly tight for life companies but there were some inherent benefits about issuing their paper in the international capital markets. One was a legal nicety. Joe Celentano, assistant vice president, Pacific Life Insurance Company, explains: "Using our special purpose vehicle to issue GIC-backed paper is a way of getting funding out of Europe without having to register as a life insurer in London. We are always looking for other avenues for funding especially now the domestic market in America has become a harder market to compete in." Another attraction was the life companies' relative unfamiliarity to Euro-market investors. More than this, they carried with them some pretty attractive credits for what were essentially domestic insurance companies. All the GIC-backed programmes carry double-A ratings. SunAmerica, since its buyout by AIG, is rated triple-A by Standard & Poor's. The reason why these companies carry such ratings is to do with the nature of the GIC-backed programme. The procedure is that the life insurance company sets up a special purpose vehicle, which then buys GICs or funding agreements from its parent company. The only difference between the two is GICs can only be sold to qualified investors, i.e. pension funds and investment contracts can be bought by unqualified investors. Both are popular investment products in the American insurance industry. All the notes issued by the special purpose vehicles are secured by these GIC or investment contracts. Therefore the notes issued off GIC-backed programmes carry the claims paying rating of the life company rather than the rating for the senior debt. As Joe Celentano at Pacific Life explains: "A lot of people talk about these structures being asset-backed. But that's not right. With GICs you are looking at the credit of the underlying life company". An investor buying GIC-backed paper is therefore buying into the business line of the insurance company itself. In an insolvency situation the GIC-backed paper ranks pari passu with the life policies themselves. The other feature that distinguishes a GIC-backed programme from a standard facility is how the funds are used. Joe Celentano explains: "These programmes are not used like typical EMTNs, where the proceeds are used to run the issuer's business. GIC-backed programmes are used for spread-arbitrage." Using GICs to play the straight reinvestment game has become a profitable business for life companies in America. And it is something that they wish to recreate in the euromarkets. But from a dealer's perspective it is largely irrelevant what the underlying security is and how the funds are spent. It is the fact that they are such opportunistic borrowers that is important. Matt Carter, head of Euro-MTNs at CSFB, points out: "Though the GIC structure maybe unusual, at the end of the day it's just an MTN. Rather than issue a GIC itself, they are issuing something in a far more user-friendly format." At the moment the MTN market seems to have a large appetite for GIC-backed paper. According to MTNWare, there has been $1, 352.54 billion worth of GIC-backed paper so far this year. This compares with $4,377.38 for the whole of last year. Rollings at Morgan Stanley says: "This time last year there were basically two players on the scene: SunAmerica and Pacific Life. Now there are six or seven and I reckon the number of programmes will grow in 1999." He goes on to explain: "Investors have become increasingly comfortable with GIC-backed programmes. After all, they are not a very complex. They are very easy to understand: the credit is basically straight corporate." And Matt Carter agrees: "There is a lot of potential in both the private and public markets for more issuance, from these guys. And there is a growing investor base that is staggering. Certainly a momentum exists to absorb a lot more GIC-backed paper." Some people believe, however, that the investor base is too shallow at the moment. Daniel Cogoi, head of Euro-MTNs at Paribas, says: "GIC-backed paper is bought by institutional fund managers: people, who can sit down and analyse the structure and the credit behind it. A lot more education is needed before these names become familiar in the retail market." Issuers also sound a word of caution. Celentano says: "You have to be a disciplined issuer: you can not issue for the sake of issuance otherwise you will be squeezed on the asset side of your balance sheet. We watch our programmes very carefully at Pacific Life." But as long as the retirement industry continues to grow as it has in America, with someone turning 50 at the rate of one every seven seconds GICs are here to stay.
July 28, 2000
