Guaranteed Investment Contract
Encyclopedia
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 and marketed to institutions 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
. GICs are sometimes referred to as funding agreements, although this term is often reserved for contracts sold to non-qualified institutions.
It is not to be confused with a Guaranteed Investment Certificate
, a product sold by Canadian banks, which also goes by the acronym of GIC.
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.
The term "GIC" is sometimes used in the context of "Guaranteed Investment Agreements" (GIAs).
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, insurance company AIG
was bailed out by the federal government to the tune of over a hundred billion dollars. Much 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.
In 2010 many GIC sellers were sued by counties such as Los Angeles and Oakland over alleged price fixing regarding GICs. Many large banks and other companies were named as 'co-conspirators'
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
that guarantees repayment of principal and a fixed
Fixed interest
A fixed interest rate loan is a loan where the interest rate doesn't fluctuate during the fixed rate period of the loan. This allows the borrower to accurately predict their future payments...
or floating interest rate
Floating interest rate
A floating interest rate, also known as a variable rate or adjustable rate, refers to any type of debt instrument, such as a loan, bond, mortgage, or credit, that does not have a fixed rate of interest over the life of the instrument....
for a predetermined period of time. Guaranteed investment contracts are typically issued by life insurance
Life insurance
Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary a sum of money upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger...
companies and marketed to institutions qualified for favorable tax status under the Internal Revenue Code
Internal Revenue Code
The Internal Revenue Code is the domestic portion of Federal statutory tax law in the United States, published in various volumes of the United States Statutes at Large, and separately as Title 26 of the United States Code...
(for example, 401(k)
401(k)
A 401 is a type of retirement savings account in the United States, which takes its name from subsection of the Internal Revenue Code . A contributor can begin to withdraw funds after reaching the age of 59 1/2 years...
plans). A GIC is used primarily as a vehicle that yields a higher return than a savings account
Savings account
Savings accounts are accounts maintained by retail financial institutions that pay interest but cannot be used directly as money . These accounts let customers set aside a portion of their liquid assets while earning a monetary return...
or United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
Treasury securities
Treasury security
A United States Treasury security is government debt issued by the United States Department of the Treasury through the Bureau of the Public Debt. Treasury securities are the debt financing instruments of the United States federal government, and they are often referred to simply as Treasuries...
. GICs are sometimes referred to as funding agreements, although this term is often reserved for contracts sold to non-qualified institutions.
It is not to be confused with a Guaranteed Investment Certificate
Guaranteed Investment Certificate
A Guaranteed Investment Certificate or GIC is a Canadian investment that offers a guaranteed rate of return over a fixed period of time, most commonly issued by trust companies or banks. Due to its low risk profile, the return is generally less than other investments such as stocks, bonds, or...
, a product sold by Canadian banks, which also goes by the acronym of GIC.
Example: Funds obtained through a municipal bond
Municipal bond
A municipal bond is a bond issued by a city or other local government, or their agencies. Potential issuers of municipal bonds includes cities, counties, redevelopment agencies, special-purpose districts, school districts, public utility districts, publicly owned airports and seaports, and any...
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.
The term "GIC" is sometimes used in the context of "Guaranteed Investment Agreements" (GIAs).
History
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 CompanyExecutive Life Insurance Company
Executive Life Insurance Company was once the largest life insurance company in California. Its financial problems and subsequent insolvency in April 1991 shocked its policyholders and the financial world....
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
Unisys
Unisys Corporation , headquartered in Blue Bell, Pennsylvania, United States, and incorporated in Delaware, is a long established business whose core products now involves computing and networking.-History:...
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, insurance company AIG
American International Group
American International Group, Inc. or AIG is an American multinational insurance corporation. Its corporate headquarters is located in the American International Building in New York City. The British headquarters office is on Fenchurch Street in London, continental Europe operations are based in...
was bailed out by the federal government to the tune of over a hundred billion dollars. Much 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.
In 2010 many GIC sellers were sued by counties such as Los Angeles and Oakland over alleged price fixing regarding GICs. Many large banks and other companies were named as 'co-conspirators'