A recent regulatory change in New York State likely will spur greater usage of fixed-income exchange-traded funds among insurance companies, a panelist said during a Fitch Ratings webinar Thursday.
A lot of insurance companies use ETFs "initially as a placeholder to eliminate cash drag, and I jokingly call it 'the gateway ETF,'" said panelist Ilene Kelman, a regional director in the insurance general accounts group at Vanguard Group. "And then when they see how well it works out, we see them start to use ETFs both tactically and strategically."
Fitch's webinar, entitled "Regulatory Change to Drive Insurance Demand for Fixed Income ETFs, "came after the New York State Department of Financial Services adopted a regulation that was effective Dec. 15 that makes it easier for insurance companies to hold bond ETFs in their portfolios.
Ms. Kelman said the change is likely to encourage an uptick in fixed-income ETF usage among insurers who may have used them sparingly as well as adoption by insurers that have never used them.
The regulation says that, until Jan. 1, 2027, shares of a fixed-income ETF will be treated as bonds for the purpose of a domestic insurer's risk-based capital report if the fund meets certain criteria, including requirements that say the ETF must track a bond index and have at least $1 billion in assets under management. The fund must also be rated by a nationally recognized statistical rating organization.
Fitch, which is one such rating organization, assigned first-time ratings to six Vanguard fixed-income ETFs, according to a Jan. 14 rating action commentary.
In recent years, New York insurance companies in particular had asked Ms. Kelman to keep them posted regarding the potential regulatory change, she said.
"So that was really where I expected all of the interest to be," Ms. Kelman said. "But then what really surprised me is as this got closer, I started hearing from companies all over the country" who had a New York subsidiary.
Insurers with New York subsidiaries were keen to use bond ETFs because often the New York subsidiary is small, she said.
"Any company that has a tiny subsidiary that has a portfolio — it's really hard to manage those portfolios with individual bonds," Ms. Kelman said. "You just can't get enough diversification and it requires a lot of work."
By using just a few ETFs instead, a diverse portfolio can be achieved with less work, and it can be managed at a very low cost, Ms. Kelman said.
New York is "always sort of a bellwether state for insurance law," said another panelist, Daniel A. Rabinowitz, a partner at the law firm Kramer Levin Naftalis & Frankel.
"It's encouraging to think that other states might pick up on this," Mr. Rabinowitz said of New York's move regarding risk-based capital treatment, adding that it is "certainly a departure" given that New York is viewed as a "kind of conservative state."
While he deferred to other panelists as to what the market impact of the more favorable risk-based capital treatment might be, the attorney said his firm has clients who are interested in such rules.
"And this is definitely a shift in the right direction, I would say," Mr. Rabinowitz said.
