Not surprisingly, institutional investors have played pivotal roles in the adoption of exchange traded funds.
Whether it’s for enhanced bond liquidity, hedging short equity exposures or establishing positions in thinly traded markets, among other reasons, institutional investors are major players in the ETF market and that’s not going to change.
Count insurance companies among the institutional users of ETFs and data confirm these firms aren’t just receptive to ETF use – they’re boosting it. Typically, insurance companies favor basic, if not bland ETFs and that’s to be expected.
Funds that check that box include the Vanguard Short-Term Bond ETF (NYSE:BSV), iShares Core MSCI EAFE ETF (NYSE:IEFA) and SPDR S&P 500 ETF (NYSE:SPY).
Insurance Interest in ETFs Is Surging
Data indicate insurance providers are quite devoted to ETFs and in increasing fashion.
“Following a generally consistent upward trend, from 2019 to 2020, U.S. insurance companies increased their ETF AUM by 18% to USD 36.9 billion,” according to S&P Dow Jones Indices.
Measure that $36.9 billion against the insurance industry’s ETF holdings at the end of 2015 and simple math shows a more than doubling of those assets.
“Insurance companies owned $15.4 billion of exchange traded funds in their general accounts at the end of 2015, up from $14.1 billion in 2014 and $13.0 billion in 2013, according to National Association of Insurance Commissioners (NAIC) data gathered by S&P Global Market Intelligence. Insurance companies only hold 1.3 percent of their surplus as regards policyholders in ETFs, but usage has become prevalent and is likely to increase given the wide array of low-cost passive products that can support both broad and narrow investment strategies,” said S&P Capital IQ in a 2016 report.
Increased use of ETFs by insurance companies is, in part, spurred by a 2017 NAIC accounting change that clarified how providers can account for fixed income ETFs on their portfolios. As a result, some studies suggest three-quarters of insurance carriers hold bond ETFs and nearly seven in 10 own equity-based ETFs.
Use of ETFs is also fairly well spread across the insurance industry. Today, life insurance providers hold the largest amount of ETFs in dollar terms, but the figures are trending higher among both property and casualty providers and health insurance providers.
“Nuances in the reporting process make it challenging to cover the entire insurance universe at the time of publication,” adds S&P Dow Jones Indices. “As we begin the 2022 analysis, which examines 2021 data, the incomplete 2020 data now automatically captures late filings. As a result, when we publish the forthcoming report examining 2021 ETF usage, the 2020 data we cite as a point of comparison will be slightly different than what we reported last year.”
In a bygone era of insurance companies’ ETF usage, the lay of the land was mostly about low-risk, short-term fixed income ETFs to generate modest income. That’s changing. Today, insurance companies still use low duration bond ETFs for short-term cash purposes, but they’re also widely embracing equity ETFs as core long-term holdings. Some providers are even embracing alternative and commodities ETFs.
Bottom line: Insurance companies are implementing ETFs in portfolios for a variety of reasons and that trend has long-term upside