ALBANY, N.Y. - New York's ban on issuing synthetic GICs could be lifted now that the state has a new insurance superintendent.
In addition, a state bill could be resurrected that would allow municipal bond insurers to provide credit enhancement for lower-rated issuers of guaranteed investment contracts.
Either move would increase the number of synthetic and traditional contract providers, some industry observers say. That, in turn, could reduce quality spreads over Treasuries.
The New York Insurance Department, which is considered the de facto national regulatory agency for the insurance industry, banned insurance company synthetics in August 1994 (Pensions & Investments, Aug. 22). The department - under former Superintendent Salvatore Curiale - halted the issuing of synthetic GICs by state-licensed insurance companies.
But Republican George Pataki's election as governor resulted in a new state superintendent of insurance - Ed Muhl - and a change of attitude. Industry sources believe the ban on insurance company-issued synthetic GICs could be lifted this year.
Larry Mylnechuk, executive director of the GIC Stable Value Association, the industry trade group, said the organization already has had "initial discussions" with the department in an effort to have the ban lifted.
"Our hope is to get the issue reconsidered and to provide more opportunities for diversification and competition," he said.
Lifting the ban would expand significantly the universe of GIC and synthetic issuers. In the case of credit-enhanced GICs, supporters contend the universe of AAA rated issuers would be significantly expanded.
Plan sponsors increasingly limit GIC placements to top-rated insurance carriers or high-quality synthetic contracts.
The credit enhancement bill would allow municipal bond insurers with higher credit ratings to offer credit enhancement to lower-rated carriers, who are frozen out of issuing GICs by their lower credit ratings. The result, claim some providers, will be a traditional GIC with an AAA credit rating.
Observers say the bill probably will originate in the insurance committees of both houses of the state Legislature this year.
But it is the New York Insurance Department's ban on insurance-company-issued synthetics that has the widest interest in the GIC industry.
Betsy Vary, GIC consultant at Buck Consultants, Princeton, N.J., said she is not surprised at the potential reversal in view of political changes in New York.
She said lifting the ban on insurance synthetics could have both positive and negative implications for the industry. "It means we may have more companies gaining access to the market. ... But I am concerned that by adding this capability to offer book-value wraps for some carriers, it may cause many companies to leave the traditional GIC market."
Providing book-value wrappers is less costly and allows the carrier to take on less risk, she said.
"If you can do the same amount of business with approximately the same profit levels, you don't have much reason to remain in the traditional GIC business."
The book-value wrapper market is dominated by a few banks and non-New York based insurance carriers, including Bankers Trust Co. and Providian Corp.
Jason Psome, managing director-stable value at Sanford C. Bernstein & Co. Inc., New York, said the New York ban has had some positive impact on the synthetic market by increasing the number of high-quality banks that have jumped in to the wrap business, including Union Bank of Switzerland, J.P. Morgan Securities Inc. and National Westminster PLC.
Another synthetic contract industry source said lifting the ban eventually could narrow spreads of traditional GICs over Treasuries "because carriers won't be as interested in doing the business, and eventually they will abandon traditional GICs altogether."
Indications are the New York Insurance Department ultimately will lift the ban because of recent action by the National Association of Insurance Commissioners. In December, the group approved a motion to proceed with drafting a model regulation governing the issuance of synthetic GICs by insurance companies.