S&P Dow Jones Indices Insurance Research Report – Special Report

ETFs In Insurance General Accounts

Following are excerpts from ETFs in Insurance General Accounts – 2019. | This report is published by the S&P Dow Jones Indices, a division of S&P Global. | View full document at: https://www.spindices.com/indexology/fixed-income/etfs-in-insurance-general-accounts-2019

Introduction
In our last report1, we showed that in 2017, insurance companies increased their use of exchange-traded funds (ETFs) by a significant amount (37% year-over-year). In 2018, insurance companies continued to increase their use of ETFs and, in spite of a market correction in the Q4 2018, held ETF assets in line with long-term growth trends. Furthermore, in 2018, the industry also displayed a divergence in their investment patterns—with companies that had previously been slow to adopt ETFs increasing their usage, and other companies, which in the past had grown ETF usage rapidly, retrenching. A divestment from Smart Beta ETFs, in particular, caused a drag on the overall share ownership and AUM of insurance companies invested in ETFs. In our fourth annual analysis of ETF usage in insurance general accounts, we explore the changing dynamics and current usage of over 1900 companies in this market.

OVERVIEW

As of year-end 2018, U.S. insurance companies had USD 26.2 billion invested in ETFs. This represents a tiny fraction of the USD 3.4 trillion of ETF assets under management (AUM) and an even smaller portion of the USD 6.3 trillion in admitted assets of U.S. insurance companies. Exhibit 1 shows the use of ETFs by U.S. insurance companies over the past sixteen years.

Exhibit 1: ETF AUM Growth

Source: National Association of Insurance Commissioners (NAIC) via S&P Global Market Intelligence.  | Data as of 12/31/18. Chart for illustrative purposes.

While ETF AUM steadily increased over the prior six years, in 2018, the AUM of ETFs in the industry declined for the first time since 2011. In 2018, U.S. insurance company ETF AUM decreased by 3% from the prior year. However, usage still showed a double-digit compound annual growth rate (CAGR) over the 3-, 5-, and 10-year periods (see Exhibit 2).

Exhibit 2: CAGR of ETF AUM

Source: NAIC via S&P Global Market Intelligence. Data as of 12/31/18. Chart for illustrative purposes.

The last quarter of 2018 had marked downturn in the equity and fixed income markets. The S&P 500 dropped 14% in the 4th quarter; a week before year-end the S&P 500 was off 20%.3

On December 19th, 2018 the Federal Reserve increased the Fed Funds rate for a fourth and last time in 2018.4 And even though 10-year Treasury5 and corporate6 yields fell during the quarter, corporate spread increased by a larger amount in the Q4 2018.7 To test if market volatility in Q4 2018 depressed the year-end AUM numbers, we also looked at the number of shares held by insurance companies. Unlike AUM, the number of shares of ETFs used by insurance companies continued to increase in 2018 (see Exhibit 3).

Exhibit 3: ETF Share Ownership Growth

Source: NAIC via S&P Global Market Intelligence. Data as of 12/31/18. Charts for illustrative purposes.

The long-term growth rate of shares has also been in the double digits, but with a slower pace than AUM growth (see Exhibit 4).

Exhibit 4: CAGR of ETF Shares

Source: NAIC via S&P Global Market Intelligence. Data as of 12/31/18. Charts for illustrative purposes.

In spite of the decrease in AUM, the growth in ETF usage still greatly exceeded the growth rate of admitted assets over the long term (see Exhibit 5).

Exhibit 5: Historical Growth of Admitted and ETF Assets

Source: NAIC via S&P Global Market Intelligence. Data as of 12/31/18. Charts for illustrative purposes.

We used a linear regression to model the growth of ETF AUM held by insurance companies. This model accurately fit the historical growth of ETFs in insurance companies (see Exhibit 6).

Exhibit 6: Linear Regression of ETF AUM

Source: NAIC via S&P Global Market Intelligence.

A regression analysis of share usage led to a similar result (see Exhibit 7).

Exhibit 7: Linear Regression of ETF Shares

Source: NAIC via S&P Global Market Intelligence.

We used these regression models to estimate the trended growth of ETFs. If insurance companies continue to invest according to trend, the use of ETFs by insurance companies could almost double in five years—using both AUM and share trends. This is substantially faster than the expected growth of admitted assets9 (see Exhibit 8).

Exhibit 8: Projected Growth of Admitted Assets, ETF AUM, and ETF Shares

Source: NAIC via S&P Global Market Intelligence & Cerulli Associates. Data as of 12/31/18. Charts for illustrative purposes.

ANALYSIS BY SIZE

We analyzed the use of ETFs to see if the size of the insurance company affected the use of ETFs. We classify a company as small if it has less that USD 500 million in Admitted Assets. Medium companies have admitted assets between USD 500 million and USD 5 Billion. Companies with admitted assets between USD 5 Billion and USD 50 Billion are classified as Large and, finally, Mega companies have more than USD 50 Billion in admitted assets.

Mega insurance companies owned most of the assets belonging to insurance companies, but only held about one-third of the insurance ETF holdings (see Exhibit 11).

Exhibit 11: Admitted Assets and ETF Assets by Company Size

Source: NAIC via S&P Global Market Intelligence. Data as of 12/31/18. Charts for illustrative purposes.

However, these companies increased their AUM by 39% over 2017. Meanwhile, Large companies pulled back from ETF allocation. Large companies increased their ETF AUM by 54% in 2017 but decreased it by 25% in 2018. On ETF share and AUM bases, both Small and Large companies pulled back from their use of ETFs. Medium companies were relatively flat for the year in terms of AUM, but increased the number of ETF shares held by 15% (see Exhibits 12 and 13).

Exhibit 12: ETF AUM by Company Size

Source: NAIC via S&P Global Market Intelligence. Data as of 12/31/18. Charts for illustrative purposes.

Exhibit 13: CAGR of ETF AUM and Shares by Company Size

Source: NAIC via S&P Global Market Intelligence. Data as of 12/31/18. Charts for illustrative purposes.

While Large companies held the majority of insurance ETF assets, Mega companies were quickly reaching parity. However, Small companies continued to hold a higher portion of ETFs in their admitted assets. The proportion of admitted assets held in ETFs continued to decline with the size of the company (see Exhibit 14).

Exhibit 14: ETF AUM and ETFs as a Percentage of Admitted Assets by Company Size

Source: NAIC via S&P Global Market Intelligence. Data as of 12/31/18. Charts for illustrative purposes.

ANALYSIS OF SMART BETA ETFS

The majority of ETF investments by U.S. insurance companies were Traditional market-weighted ETFs. While about 20% of the U.S. total market invested in Smart Beta ETFs,only 12% of AUM was allotted to these alternative strategies by insurance companies (see Exhibit 64).

Exhibit 64: U.S. and Insurance ETF AUM by Smart Beta

Source: NAIC via S&P Global Market Intelligence. Data as of 12/31/18. Charts for illustrative purposes.

In terms of size, Small and Medium companies invested more in Smart Beta than Large or Mega companies. P&C companies used, proportionally, twice as many Smart Beta ETFs as Life & Health companies. Similarly, the proportional use of these ETFs by Other companies is much larger than that of Stock or Mutual companies (see Exhibit 65).

Exhibit 65: Smart Beta Allocation by Company Type, Organizational Structure & Company Size

Source: NAIC via S&P Global Market Intelligence. Data as of 12/31/18. Charts for illustrative purposes.

While the broader U.S. market preferred the Value and Growth Smart Beta ETF categories, insurance companies preferred Dividend and Value (see Exhibit 66).

Exhibit 66: U.S. and Insurance ETF AUM by Smart Beta Category

Source: NAIC via S&P Global Market Intelligence. Data as of 12/31/18. Charts for illustrative purposes.

However, companies have significantly pulled back from the use of Smart Beta ETFs. In fact, absent the decline in Smart Beta ETFs, the use of ETFs by insurance companies grew on both an AUM and share basis (see Exhibit 67).

Exhibit 67: CAGR of Insurance ETF AUM and Shares by Smart Beta

Source: NAIC via S&P Global Market Intelligence. Data as of 12/31/18. Charts for illustrative purposes.

This is in stark contrast to the non-insurance U.S. ETF market, where growth rates for AUM and shares of Smart Beta ETFs have outperformed those of market-weighted ETFs (see Exhibit 68).

Exhibit 68: CAGR of U.S. ETF Market AUM and Shares by Smart Beta

Source: NAIC via S&P Global Market Intelligence. Data as of 12/31/18. Charts for illustrative purposes.

Nor does it seem that a particular part of the industry discriminates against Smart Beta. In Exhibit 69, we see that all types of insurance companies reduced their use of Smart Beta ETFs in the past year. A similar analysis for organizational structure or size would yield similar results.

Exhibit 69: CAGR of Smart Beta Insurance ETF Market AUM and Shares by Company Type

Source: NAIC via S&P Global Market Intelligence. Data as of 12/31/18. Charts for illustrative purposes.

We also see that the insurance industry is moving from Smart Beta in all categories except for those with the least allocation (see Exhibit 70). Reasons why the insurance industry behaves differently from the broader U.S. ETF market deserves further industry analysis.

Exhibit 70: Insurance ETF AUM by Smart Beta Category

Source: NAIC via S&P Global Market Intelligence. Data as of 12/31/18. Charts for illustrative purposes.

By S&P Dow Jones Indices, A Division of S&P Global
Raghu Ramachandran, Head of Insurance Asset Channel | raghu.ramachandran@spglobal.com

Endnote
1“ETFs in Insurance General Accounts – 2018,” Raghu Ramachandran, S&P Dow Jones Indices, May 2018.
3https://my.spindices.com/indices/equity/sp-500; data retrieved 20 May 2019.
4https://apps.newyorkfed.org/markets/autorates/fed%20funds; data retrieved 20 May 2019.
5https://fred.stlouisfed.org/series/DGS10/; data reterived 20 May 2019.
6https://fred.stlouisfed.org/series/BAMLC0A2CAAEY; data reterived 20 May 2019.
7https://fred.stlouisfed.org/series/BAMLC0A2CAA; data reterived 20 May 2019.
9“U.S. Insurance General Accounts 2018,” Cerulli Associates, Nov. 12, 2018, p. 44.
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