US Insurers’ ETF Use Rises

[This article appears in our July 2019 issue of ETF Report.]

A recent Greenwich Associates/Invesco study showed about 70% of U.S. insurance companies now use ETFs in their general accounts, with 90% of multiline companies saying they use ETFs in their investments. Property and casualty firms are a close second, at 80%, while 47% of life insurance companies surveyed say they use ETFs in their investments.

Chris Marx, head of institutional insurance at Invesco, says those figures represent about $26 billion in assets across the insurance community. However, he also notes the insurance industry holds between $5.6 trillion to $6 trillion in assets, meaning there’s room for greater ETF adoption.

But Marx says it’s going to take greater education among regulators and users themselves, because there’s still a lack of understanding about how to value ETFs for accounting purposes as well as the types of ETFs available, especially factor-based ones.

Survey Overview
Greenwich Associates interviewed 51 professionals across the insurance industry for the ETF study, with Invesco sponsoring it. Of participants, 33% were life insurance companies, 29% represented property and casualty insurers and 20% were multiline insurers. Reinsurance and health insurance companies were also part of the study. The majority of participants were large companies, with 57% having over $10 billion in general account assets, and 36% had more than $20 billion.

There are three main reasons insurers are embracing ETFs, the study showed. The main reason is better access to cash or liquidity management. Insurers also cite ETFs’ ability to efficiently gain or maintain specific exposures. Further, ETFs are cheaper when factoring in management fees and transaction costs.

The study showed insurers use ETFs differently, depending on their field. Life insurers use ETFs tactically, to address short-term liquidity and cash management in fixed income portfolios. Eighty-three percent say they hold ETFs for six months or less, on average. In the survey, every single life insurer said their firm uses bond ETFs, but only 38% say they use equity ETFs.

“They’re using it for interim exposure,” Marx explained. “If you’re a large life insurance company, you can’t necessarily time premiums with what’s available in the new-issue market. It’s an easy way to put the cash to work.”

Property and casualty insurers use ETFs for strategic equity exposure, with three-quarters of these respondents saying they hold ETFs for a year or more, and 50% saying their holding periods are longer than two years. Ninety-two percent of these insurers use equity ETFs, and half used fixed income ETFs.

Marx says it makes sense insurers want to expand their investment options, as these organizations must plan for long-term
scenarios while dealing with short-term market volatility that can wipe out returns.

Use Likely To Grow
A key reason for the increased ETF use was a 2017 ruling by the National Association of Insurance Commissioners allowing U.S. insurers to use “systematic value” starting in 2018 to account for fixed income ETFs.

Systematic value can reduce the volatility of fixed income ETF valuations when considering interest-rate changes and other factors, versus using a fair value. That helps lower financial statement volatility and helps insurers meet internal risk and capital requirements.

“Without a doubt, the systemic value accounting has been the biggest driver of growth in fixed income ETF usage in the insurance space,” Marx said. “It’s a very big, positive change.”

However, Greenwich notes, not many insurers know they have to make a one-time choice to record the fund at fair or systematic value for accounting purposes, and 40% of insurers say they’re not fully informed about the rule. Marx says it’s surprising insurers still aren’t fully aware of the rule, given how much has been written about it, and it shows further education is necessary.

Study respondents say they want to use ETFs more too, with 40% saying they plan to increase ETF allocation in the next three years, and none said they would reduce use. Two-thirds of property and casualty insurers said they planned to increase their ETF investments, while 36% of life insurers expect greater ETF adoption.

Factoring In Factor ETFs
Another area for education is factor ETFs, Marx says, as insurers haven’t embraced them the way pension funds and asset managers have. Property and casualty insurers are starting to use these more, with 25% of survey participants saying they’ve used factor strategies, but only 10% of multiline and 6% of life insurers admitting they’ve used them.

“We see our insurance clients having an interest in factors, but holding off until they better understand how they work and can look at track records,” he said. “I think that the adoption of factors will absolutely follow the growth of ETFs; they’re just a few years behind.”

Marx reiterated that although 70% of insurers are using ETFs in some form, that means 30% don’t, opening up the possibility for further adoption. Study participants who don’t use the vehicle say they prefer to trade individual securities. However, others cite that regulations are preventing them from adopting ETFs, including reasons such as NAIC rating requirements or accounting issues.

All of this—better understanding of systematic value, how factors work, and the NAIC’s greater understanding of ETFs—goes back to education, he says. Unlike with other institutions, change happens slowly in the insurance industry, Marx says, but he’s confident change will come based on the survey data and what he’s seen so far.

“I think there’s going to be a significant amount of growth [once there is] this understanding of how everything works, from not only the investment vehicle and what your underlying exposures are, but also as relates to how the systematic value accounting works,” he said. “I think as time passes, if we have this conversation in 12 months or 24 months, it’ll be a conversation where ETFs are more widely accepted.”