ETFs Are in Higher Demand from Insurers | Chief Investment Officer

Insurance companies, which historically favor bonds, have inched up their use of exchange-traded funds, which trade like stocks. The number of insurers investing in ETFs has more than tripled through 2017, to 612, according to consulting firm Greenwich Associates. That’s 62% of all insurance carriers.

At yearend 2017, US insurance companies had $27.2 billion invested in ETFs, a 37% increase from 2016, according to the study, done for State Street Global Advisors, a major ETF issuer (it launched the first one in 1993). To be sure, this is less than 1% of all insurance assets.

Some two-thirds of insurance assets are in bonds, which insurers prefer because of fixed income’s lower volatility and steady income stream from interest. Bonds’ maturities are customarily matched to clients’ ages and other actuarial criteria, with the aim of best being able to pay out when policyholders or their beneficiaries file claims.

Aiding the rise in insurer ETF usage is the National Association of Insurance Commissioners decision in April 2017 to change the accounting valuation method of bond ETFs that the carriers hold. Before, fixed-income ETFs were valued by their price, which can fluctuate substantially on the stock exchanges where they trade. Now, the industry’s chief regulatory body ruled, these ETFs can be valued by the underlying bonds in their portfolios.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

The study found that, of the almost 40% of insurers that don’t invest in ETFs, most avoid them because of state laws or internal company guidelines prohibiting such investments. Their stock-like nature likely is the underlying reason.

The second-biggest reason for shunning ETFs also has to do with returns: These insurers don’t think ETFs will help them beat market benchmarks. That’s no surprise, since ETFs generally track market indexes.

Among non-users, though, some 82% said they would reconsider in the future.

Of the insurance outfits that do use ETFs, the attraction ranges from their low cost (as primarily index-based products, they don’t need a lot of expensive analysts and traders to function) and elimination of “cash friction.”

This is where an investor sells an asset and parks the cash waiting to buy something else with it. Cash doesn’t pay a lot of interest. Presumably, owning an index-linked vehicle, like an ETF, which contains many securities, lowers the need to be trading individual stocks, bonds, and other assets.

The study found that ETF investment was almost evenly split between life (42%) and property-casualty companies (38%), with health and reinsurance insurers making up the rest. There was also a fairly even ownership split among small (less than $5 billion in assets), medium ($5 billion to $50 billion), and large (above $50 billion) insurance companies.

Why Index Fund Creator Jack Bogle Hated ETFs

Smart Beta ETFs Get Even More Popular

Tags: Bonds, ETFs, Greenwich Advisors, Indexes, insurance, State Street Global Advisors

The Washington State Investment Board (WSIB) has committed up to $1.6 billion in new private market investments, spanning private equity, tangible assets, and real estate.

The $99.4 billion pension plan already has among the highest commitments percentwise to private markets of any public US pension plan: 20.27% of plan assets to private equity, 16.71% to real estate, and 4.7% to tangible assets. Consequently, it has one of the lowest equity exposures, just 31%.

Agenda material and a WSIB release after the board’s February 21 meeting show that the board is moving into new funds as existing commitments expire in efforts to keep up the high private markets exposure. The illiquid investments have helped the WISB beat the returns of many of its peers in the institutional investment world in the long- and short-term. In the fiscal year ending June 30, it had returns of 10.4%.

New private market investments approved by the board include:

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

An up to $200 million commitment in TSSP Capital Solutions, L.P., a special situations private equty investments fund that is being raised by TPG Sixth Street Partners. The fund has a target size of $2 billion.
An up to $200 million commitment to a new private equity investment strategy with one of WISB’s existing private equity general partners. The name of the partner and details of the investment strategy were not disclosed.

Investment staff also approved the following private equity investments using delegated authority to make investments without approval of board members:

An investment of up $300 million in Trident VIII, a buyout fund focused on the financial services industry in North America and Western Europe. The fund, which will be managed by Stone Point Capital, has a $5.75 billion target size.
An investment of up to $200 million in the Menlo Special Opportunities Fund, being raised by venture capital firm Menlo Ventures. The fund has a target size of $500 million and will invest in early-growth and late-stage investments.
An investment of up to $250 million in the Rise Fund II, a growth equity and middle market fund being raised by TPG Capital. The fund has a hard cap of $3 billion. It is the largest so-called impact fund being raised to date, aiming to make socially responsible investments that can deliver market returns. WISH had previously invested in the Rise Fund, a $2 billion investment fund, that is still in the process of taking stakes in socially responsible businesses.

In the area of tangible assets, the WISB board approved an additional $200 million commitment to Geronimo Renewable Infrastructure Partners, a North American renewable energy fund. This is the WSIB’s second investment in the fund after a $300 million commitment in 2017.

The WISH board, which runs its real estate program through a series of real estate partnerships and operating companies, gave new capital of $250 million to a new company, Crane Capital. It also gave Crane another $400 million that was overseen by Evergreen Real Estate Partners.

Evergreen manages more than $5 billion for WSIB. It received a $500 million follow-on commitment from WSIB in December, shows a system press release.

Tags: Pension, Private Equity, Real Estate, Washington State Investment Board