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Investment Insights

The Wrap Industry Appears Strong

Recovery from financial crisis sees insurers take leading role.

Antonio Luna, Portfolio Manager
Robert Madore, Portfolio Manager
Whitney Reid, Portfolio Specialist

When we speak with defined contribution plan sponsors and their consultants and advisors these days, we frequently field questions about the health of wrap providers and the availability of wrap capacity. We’re happy to be able to respond that, from our perspective, the wrap industry is strong and appears to have fully recovered from the 2008–2009 financial crisis.

At the height of the crisis, wrap capacity declined sharply as several major providers wound down their existing contracts and exited the industry. However, by 2014 the wrap industry was well on its way to a full recovery. By June 2019, there were 18 active wrap providers in the market—five more than in 2009—and nearly USD 43 billion in additional wrap capacity was available to stable value managers (Figure 1).

However, while wrap capacity has recovered, the composition of the wrap industry has changed. Today, insurance companies play a bigger role in the industry relative to banks. Heading into the crisis, banks played a much bigger role, according to Valerian Capital.

Besides limiting wrap capacity, the crisis caused wrap fees to more than triple, from a range of 6 to 8 basis points (bps) before the crisis to 25 to 30 bps at its height. Since then, fees have moderated as wrap capacity has increased, falling to their current range of 15 to 20 bps.

Higher fees have helped offset increased costs as wrap providers have invested in more sophisticated risk management systems and, in some instances, partnered with investment consultants to augment their manager surveillance capabilities. We believe wrap fees can continue to move lower from here, but there may be resistance as we get closer to 15 basis points, given the increased compliance and surveillance costs associated with managing wrap products.

(Fig. 1) Wrap Capacity Now Appears Plentiful
Stable Value Wrap Providers Ranked by Market Share
As of June 30, 2019

1The credit ratings shown here are for the entity issuing the book-value wrap agreements; the complete legal entity name has been abbreviated. Insurance company ratings refer to claims-paying ability. Bank ratings are the issuer rating for Moody’s and the long-term foreign issuer credit rating for S&P.
2Outstanding notionals.
3S&P upgrade from A on 6/11/19.
4Moody’s lowered from Aa2 on 5/28/19
5As of May 2018 the notional amounts for JPMorgan were reduced by USD 15 billion to be consistent with market intelligence.
Source: Valerian Capital.
The information contained in this document (the “Information”) is intended to be used for informational purposes only. Information is provided as of the date hereof or such other date as stated in the Information and there are no assurances that such Information will be correct as of any other date. The notional outstanding is based on market research and public financial reporting by issuers. Where public financial statements do not include exact numbers, Valerian has estimated notional outstanding from industry sources and verified by the providers unless noted otherwise. Valerian Capital Group LLC makes no representations as to the validity of the Information. About the firm: Valerian Capital Group “Valerian” is a consulting firm that has significant experience in the book value wrap business. In light of the lack of book value wrap capacity for stable value funds, the principals formed Valerian in mid-2009 to focus on developing new capacity for the market.

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