Insurance Companies Could Help Fuel ETF Industry Growth
August 3, 2016 by Max Chen
Insurance companies are slowly including exchange traded funds in their general accounts as a way to lower costs and to easily access high-quality assets.
“Insurance companies only hold 1.3% of their surplus as regards policyholders in ETFs, but usage has become prevalent and is likely to increase given the wide array of low-cost passive products that can support both broad and narrow investment strategies,” writes Todd Rosenbluth, S&P Global Market Intelligence Director of ETF Research, in a note.
In 2015, insurance companies held $15.4 billion in ETFs in their general accounts, compared to $14.1 billion in 2014 and $13.0 billion in 2013, according to the National Association of Insurance Commissioners (NAIC).
S&P Dow Jones Indices found that ETF assets held by insurance companies have more than doubled in the 10 years ended 2015 and expects ETF holdings by insurance companies to double in five years.
“While alternatively weighted smart-beta ETFs gained in popularity in the broader investment community in 2015, lower-cost market-cap weighted ETFs remained the most widely held,” Rosenbluth said.
Insurers’ preferences for traditional beta-index ETFs may be not all to surprising as they are considered more conventional investment plays. Moreover, these funds may have garnered a high-quality, risk-based capital NAIC designation. The higher the quality, the less capital insurers will be required to back up the investment.
“NAIC 1 is assigned to obligations exhibiting the highest quality,” according to NAIC. “Credit risk is at its lowest and the issuer’s credit profile is stable. This means that interest, principal or both will be paid in accordance with the contractual agreement and that repayment of principal is well protected.”
The NAIC designations range from 1, or highest quality, to 6, or lowest quality. ETFs that are not NAIC designated are considered equities under the NAIC Financial Conditions Framework, even if the underlying assets are debt securities.
In recent years, the NAIC has revised its designations to allow fixed-income ETFs to carry the same dispensations as bonds – fixed-income ETFs originally fell under the same designation as equity ETFs, which caused insurers to pay higher capital charges on the bond ETFs.
Among the top insurers with ETF holdings, USAA Insurance Group held $1.6 billion in ETF assets, including large positions in Vanguard Short-Term Bond ETF (NYSEArca:BSV), iShares Core MSCI EAFE ETF (NYSEArca: IEFA) and SPDR S&P 500 ETF (NYSEArca: SPY).
The most popular ETF among all insurers was the iShares iBoxx $ Investment Grade Corporate Bond ETF (NYSEArca: LQD).
“Although life insurance companies have the most general account assets, property and casualty insurance companies have been the more frequent adopters of ETFs,” Rosenbluth added.
Equity ETFs were the most common among life insurers but they also held a larger portion in fixed-income ETFs than P&C insurers.
