By Todd Rosenbluth, CFRA
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. Moreover, some 75% 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% 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.
The National Association of Insurance Commissioners (NAIC) – the insurance industry’s chief regulatory body- recently changed the way fixed income ETFs are designated from a capital requirement perspective. Previously, all ETFs (fixed income and equity) were designated as equities by the NAIC. Now, fixed income ETFs are designated like bonds.
“By giving fixed income ETFs regulatory capital parity with bonds, the NAIC’s move has greatly enhanced the already attractive value proposition for ETFs,” noted Cathy Seifert, CFRA equity insurance analyst.
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. 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% of all insurance companies) had invested in 424 different ETFs, up from 260 firms and 126 ETFs a decade ago.
CFRA further believes demand will accelerate across the insurance spectrum, with insurers of varying sizes and business mixes increasing their utilization of ETFs to provide diversification, liquidation, and/or to lower investment costs.