ETFs Continue Popping Up in Insurance General Accounts

It’s a topic recently highlighted in this space, but one that’s worth mentioning again: Insurance companies continue embracing exchange traded funds in general accounts.

Recent data from S&P Dow Jones Indices confirms insurance providers again upped ETF exposure in 2021, marking the 18th consecutive year in which they’ve done that. Traditionally, insurance carriers allocate the bulk of their investment portfolios to fixed income instruments. That makes sense because the companies need to be ultra-prudent while generating reliable income.

However, insurance companies can and do hold equities, but rather than engage in active stock-picking, they turn to ETFs for the bulk of their equity allocations. Add to that, insurance carriers are increasing hospitable to fixed income ETFs, even as interest rates rise.

Bottom line: Insurance companies are a legitimate, growing frontier of institutional ETF adoption and there’s plenty more growth to be had on this front.

What the Survey Says

Raghu Ramachandran, head of insurance asset channel at S&P Dow Jones Indices, points out that last year, insurance companies shifted to fixed income ETFs while their assets in ETFs remained sticky.

“Indeed, in 2021, insurance companies added to Fixed Income ETFs while removing funds from Equity ETFs. In our seventh annual study of ETF usage in U.S. insurance general accounts, we also analyzed the trading of ETFs by insurance companies,” he wrote. “On average, insurance companies traded twice as many ETFs during the year as they held at the beginning of the year. Overall, 2021 trade volume was relatively flat compared with 2020. This was primarily because intra-year turnover declined by 24%.”

As noted above, there’s plenty of room for insurance providers to increase exposure to ETFs because compared to other institutional players, carriers are lightly allocated to ETFs.

“As of year-end 2021, U.S. insurance companies invested USD 45.4 billion in ETFs. This represented only a fraction of the USD 7.2 trillion in U.S. ETF AUM and an even smaller portion of the USD 7.8 trillion in invested assets of U.S. insurance companies,” adds Ramachandran.

It’d be reasonable to assume that insurance companies allocate capital to relatively boring ETFs, such as aggregate and municipal bond strategies on the fixed income side and basic beta/plain vanilla/broad market fare on the equity side. Interestingly, data suggest there is some “flair” in insurance companies’ ETF selections because, last year, carriers, invested in more than 20% of the overall domestic ETF universe.

“In 2021, insurance companies invested in 568 different ETFs. The number of companies investing in ETFs increased to 674 and the percentage of companies investing in ETFs increased to 38%,” says Ramachandran.

He doesn’t go into specifics, but at almost 570 ETFs, it’s not a stretch to assume insurance companies are embracing corporate bond ETFs in some form and, on the equity side, potentially sector and industry funds, among other nuanced strategies.

Broad-Based Enthusiasm

Adding to the buoyant growth outlook for ETF adoption in the insurance industry is the point that usage is brisk across the industry – health, life and property and casualty.

“All three types of insurance companies grew their ETF assets in 2021. After a growth spurt in 2020, Life companies only grew their ETF holdings by 13% in 2021; P&C companies, meanwhile, grew at 17%,” according to Ramachandran.

Not surprisingly, large and mega insurers control the bulk of ETF assets in the industry, but mid-sized and smaller providers are joining the party, too.