Caution is in their DNA, but that hasn’t stopped insurers from jumping into the craze for exchange-traded funds with both feet.
Already some of the fastest-growing institutional buyers of ETFs, these conglomerates are now issuing them to compete with conventional money managers such as Vanguard Group and BlackRock Inc. They’re betting that brand names built on protecting your future can steal away assets -- and it seems to be working. Insurers’ home-grown funds now oversee more than $25.3 billion, up from just $1.9 billion five years ago.
With low interest rates weighing on the business of selling life policies, asset management -- which generates fees while tying up less capital -- has become an essential diversifier for insurance companies. And simple, quick and relatively cheap-to-set-up ETFs are an ideal vehicle for insurers looking to boost their bottom line, particularly if they can just repackage their tried-and-tested strategies.
“Passive is impacting flows in the asset management industry,” John Barnidge, an analyst at Sandler O’Neill & Partners LP, said in a phone interview last month. “They’re probably trying to fight back a little bit, accepting that it’s part of the reality and doing their own ETFs.”
United Services Automobile Association started its first ETFs in October, while Principal Financial Group Inc. introduced four since the start of last month to boost its stable of strategies to 12, data compiled by Bloomberg show. New York Life Insurance Co. has 23 ETFs after buying IndexIQ in 2015, while TIAA’s Nuveen Investments unit has 11 after hiring Martin Kremenstein that year to develop its ETF business.
Even Prudential Financial Inc., the largest U.S. life insurer by assets, is exploring ways to enter the market through a unit of its $1 trillion asset manager, PGIM, a person familiar with the matter said in September. Nationwide Mutual Insurance Co., one of the top 10 home and auto insurers in the U.S., joined the game this year.
“When you have multiple insurers with an ETF program then you want to jump in,” said Paul Kim, head of ETF strategy at Principal, who’d like to have as many as 30 funds within five years. “It’s a rational competitive response.”
Increasingly Familiar
It wasn’t always so.
A race to the bottom on fees initially made Principal steer clear of ETFs, according to Jim McCaughan, who leads the insurer’s asset manager. But the rise of actively managed funds -- which typically charge more -- changed all that by offering the company a way to couple its existing capabilities with more efficient distribution, he said.