US insurers accelerate ETF use
February 21, 2019

According to a new report from Greenwich Associates and sponsored by State Street Global Advisors, Insurance Company Investments in ETFs: Accelerating Growth Ahead, 62 percent of US insurance companies are now utilizing exchange-traded funds (ETFs) in their general accounts for reserve and surplus exposures, and among those who have not yet embraced ETFs, 82 percent expect their organizations will reconsider that decision in the next three years.

Three-quarters of insurers that use the funds are investing in fixed income ETFs and 69 percent invest in equity ETFs. Among the factors shaping the decision to invest in fixed income ETFs, 64 percent of the companies participating in the Greenwich Associates 2018 US Insurance ETF Study indicated that having a rating from the National Association of Insurance Commissioners (NAIC) and being eligible for inclusion on Schedule D are key determinants.

In addition, the recent regulatory evolution of being able to utilize the more bond-like modified, amortized cost method of accounting for fixed income ETFs known as "systematic value" has greatly increased insurers' interest in using ETFs as tools within the general account. 

"Regulations play a central role in determining whether, how, and how much insurers invest in ETFs - or any other vehicle for that matter," says Kat Sweeney, Head of Institutional Sales for SPDRs in the Americas, State Street Global Advisors.

"Insurers have long used ETFs for equity exposure, but the NAIC's recent decision to allow insurers in the US to apply the less volatile treatment of ‘systematic value' to ETFs for accounting purposes has helped open up the rest of an insurance company's general account."

The five most common applications of ETFs by insurers include:  to eliminate cash friction (47 percent); to optimize asset allocation (45 percent); core equity and beyond (42 percent); to implement liquidity sleeves (34 percent); core fixed income and modifying exposures (34 percent). 

While the study's respondents totalled approximately $1.9 trillion in combined assets and were evenly split among small (<$5 billion), midsize ($5–50 billion) and large (>$50 billion) insurers, the applications for ETFs can vary based on not only their line of coverage, but also into which size bucket they fall into.

"When drilling deeper into the data, average holding periods indicate that smaller insurers are more likely to use ETFs for strategic purposes while the largest firms rely on ETFs for short-term tactical decisions like eliminating cash drag and longer-term, strategic functions like constructing a low-cost core portfolio," says Andrew McCollum, Greenwich Associates Managing Director and author of the new report.

Greenwich Associates projects that ETF investments by insurance companies will grow at an accelerated rate for the next several years. Like pension funds and other institutional investors, insurance companies that initially experimented with ETFs soon discovered that an ETF's liquidity, transparency and ease of use makes the vehicle an effective tool for a variety of tactical and strategic functions.

Overall, 61 percent of insurance companies that use ETFs expect to increase their usage over the next three years, and among the life and P&C companies that make up the majority of the participants in the study, not a single respondent plans to reduce allocations to ETFs in that time frame.

"Fixed income will be at the center of much of this growth," says Chad Nettleship, Insurance ETF Specialist for State Street Global Advisors. "The expansion will not be limited to fixed income portfolios, however, as insurers expect to increase their use of ETFs to target specific equity opportunities, with international equities and emerging markets equities named as future areas of focus."





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According to a new report from Greenwich Associates and sponsored by State Street Global Advisors, Insurance Company Investments in ETFs: Accelerating Growth Ahead, 62 percent of US insurance companies are now utilizing exchange-traded funds (ETFs) in their general accounts for reserve and surplus exposures, and among those who have not yet embraced ETFs, 82 percent expect their organizations will reconsider that decision in the next three years.

Three-quarters of insurers that use the funds are investing in fixed income ETFs and 69 percent invest in equity ETFs. Among the factors shaping the decision to invest in fixed income ETFs, 64 percent of the companies participating in the Greenwich Associates 2018 US Insurance ETF Study indicated that having a rating from the National Association of Insurance Commissioners (NAIC) and being eligible for inclusion on Schedule D are key determinants.

In addition, the recent regulatory evolution of being able to utilize the more bond-like modified, amortized cost method of accounting for fixed income ETFs known as "systematic value" has greatly increased insurers' interest in using ETFs as tools within the general account. 

"Regulations play a central role in determining whether, how, and how much insurers invest in ETFs - or any other vehicle for that matter," says Kat Sweeney, Head of Institutional Sales for SPDRs in the Americas, State Street Global Advisors.

"Insurers have long used ETFs for equity exposure, but the NAIC's recent decision to allow insurers in the US to apply the less volatile treatment of ‘systematic value' to ETFs for accounting purposes has helped open up the rest of an insurance company's general account."

The five most common applications of ETFs by insurers include:  to eliminate cash friction (47 percent); to optimize asset allocation (45 percent); core equity and beyond (42 percent); to implement liquidity sleeves (34 percent); core fixed income and modifying exposures (34 percent). 

While the study's respondents totalled approximately $1.9 trillion in combined assets and were evenly split among small (<$5 billion), midsize ($5–50 billion) and large (>$50 billion) insurers, the applications for ETFs can vary based on not only their line of coverage, but also into which size bucket they fall into.

"When drilling deeper into the data, average holding periods indicate that smaller insurers are more likely to use ETFs for strategic purposes while the largest firms rely on ETFs for short-term tactical decisions like eliminating cash drag and longer-term, strategic functions like constructing a low-cost core portfolio," says Andrew McCollum, Greenwich Associates Managing Director and author of the new report.

Greenwich Associates projects that ETF investments by insurance companies will grow at an accelerated rate for the next several years. Like pension funds and other institutional investors, insurance companies that initially experimented with ETFs soon discovered that an ETF's liquidity, transparency and ease of use makes the vehicle an effective tool for a variety of tactical and strategic functions.

Overall, 61 percent of insurance companies that use ETFs expect to increase their usage over the next three years, and among the life and P&C companies that make up the majority of the participants in the study, not a single respondent plans to reduce allocations to ETFs in that time frame.

"Fixed income will be at the center of much of this growth," says Chad Nettleship, Insurance ETF Specialist for State Street Global Advisors. "The expansion will not be limited to fixed income portfolios, however, as insurers expect to increase their use of ETFs to target specific equity opportunities, with international equities and emerging markets equities named as future areas of focus."



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