As of year-end 2021, insurance companies held USD 45.4 billion in ETFs in their general accounts—a 15% increase over 2020. We recently published a research piece on the use of ETFs by insurance companies. In this blog post, we explore the increased use of fixed income ETFs in these portfolios.

Fixed income securities comprise the majority of insurance portfolios. However, equity ETFs continue to constitute the majority of insurance companies’ ETF usage, largely due to regulatory constraints. Even as regulation has changed and made it easier for insurance companies to invest in ETFs, fixed income ETF adoption was slow. Recently, that has begun to change, and insurance companies’ fixed income ETF usage has nearly doubled in the past two years (see Exhibit 1).

Again, as to be expected, investment-grade funds dominated insurance companies’ fixed income ETF usage, but there has been an increase in their use of high yield ETFs (see Exhibit 2). Over the past 1-, 3-, 5- and 10-year periods, the growth rate of high yield ETFs has exceeded the growth of investment-grade ETFs within insurance general accounts. In 2021, high yield ETF AUM increased by 80%, and the proportion of ETFs invested in high yield by insurance companies exceeded the proportion of high yield ETFs in the overall U.S. ETF market.

Life insurance companies have driven the growth of fixed income ETF usage. In 2015, life companies had only USD 617 million invested in fixed income ETFs. By 2021, this had grown 13 times to reach USD 7.8 billion (see Exhibit 3). Indeed, as a proportion of the usage, life companies have a majority of their ETF investments in fixed income, whereas P&C companies still continue to invest mostly in equity ETFs. Health companies also invest heavily in fixed income ETFs, but their pool of assets is much smaller than that of life and P&C companies.

Even though insurance companies tended to hold fewer fixed income ETFs, they traded them more frequently. Trade volume for fixed income ETFs exceeded the trade volume for equity ETFs in 2019, and fixed income ETFs continued to dominate insurance trading through 2021 (see Exhibit 4). If we consider the trade ratio (the amount traded in a year divided by the assets held at the beginning of the year), we see that insurance companies used fixed income ETFs much more actively than equity ETFs (see Exhibit 5).

Given the size of the insurance fixed income pool, we continue to monitor this activity for future growth.