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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. GICs are sometimes referred to as funding agreements, although this term is often reserved for contracts sold to non-qualified institutions.
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.
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.
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.
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.
- Lemke and Lins, ERISA for Money Managers, §2:141 (Thomson West, 2015-2016 ed.).
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- 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
- 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.
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