Insurance Providers Cozy Up To ETFs

Insurance providers are among the institutional investors driving exchange-traded funds growth, and data suggest there is plenty of room for insurers to play a significant role in the adoption of ETFs among professional investors.

The Role Of Insurers

“Insurers held just $19 billion in ETF assets at the end of 2016 — a minuscule portion of the $6 trillion in insurance general account assets,” said CFRA Research's Director of ETF & Mutual Fund Research Todd Rosenbluth in a note Monday. “Moreover, some 75 percent of these assets were in equity ETFs, despite insurers' asset allocation strategies that tilt heavily toward fixed income investments. Yet, growth in the use of ETFs in general has been healthy: ETF assets held by insurers rose 20 percent in 2016 amid gains for both equity and fixed income ETFs. CFRA believes the industry may be at an important inflection point, though, following a significant regulatory change.”

As CFRA noted, $19 billion is a scant percentage of the overall ETF universe, but that is up from $15.4 billion at the end of 2015, $14.1 billion in 2014 and nearly 50 percent more than the amount insurers allocated to ETFs at the end of 2013.

A Change Of Perspective

Following a recent regulatory change by the National Association of Insurance Commissioners, fixed income ETFs could become a bigger percentage of insurance providers' investment portfolios. The NAIC now views bond ETFs as bonds whereas the group previously classified bond ETFs as equity instruments.

The iShares iBoxx $ Investment Grade Corporate Bond ETF LQD, the largest corporate bond ETF, and the Vanguard Short-Term Bond ETF BSV are among the bond ETFs already held by insurance companies.

“This change is set to be implemented in early 2018 and should significantly increase insurers' demand for fixed income ETFs, CFRA believes, as the industry has gained comfort with the ETF wrapper,” said the research firm. “According to a recent report from Raghu Ramachandran, head of the insurance asset channel at S&P Dow Jones Indices, 571 insurance companies (approximately 30 percent of all insurance companies) had invested in 424 different ETFs, up from 260 firms and 126 ETFs a decade ago.”

Although there has been some adoption of smart beta ETFs by insurance providers, on the equity side these investors typically plain vanilla funds, such as the SPDR S&P 500 ETF SPY and the iShares Russell 2000 ETF IWM. SPY is the world's largest ETF of any variety and IWM is the largest small-cap ETF.