U.S. insurers set to continue growing fixed-income ETF holdings after new NYC guidelines – Fitch

According to a report by Fitch Ratings, US insurers will likely continue to increase their holdings of fixed-income exchange-traded funds.

Fitch said it has rated 10 such ETFs since new guidelines took effect in New York last December that make it easier for insurers to hold shares of fixed-income ETFs. A rule passed by the New York State Department of Financial Services, effective Dec. 15, allows shares of an ETF, through Jan. 1, 2027, to be treated as bonds for reporting purposes. on the risk-based capital of a national insurer. whether the ETF meets certain criteria.

Among those criteria are requirements that the ETF track a bond index, have at least $1 billion in assets under management, and be rated by a “nationally recognized statistical rating organization.” According to Fitch’s report on Tuesday, 24% of U.S.-domiciled fixed-income ETFs have assets under management totaling more than $1 billion.

Since the regulations took effect, Fitch has rated six fixed-income ETFs from the Vanguard group, three from Invesco and one from VanEck, Fitch senior analyst Kimberly Green said in an interview, which also included comments. of Greg Fayvilevich, a senior director and head of the global fund and asset management group at Fitch.

Asked why Fitch expects US insurers to continue to increase their holdings of fixed income ETFs, Ms Green said the agency had seen “a general trend in the market towards increased exposure to Fixed Income ETFs”. Ms. Green and Mr. Fayvilevich cited several reasons for the appeal of these ETFs, including increased liquidity, easier diversification and the ability to quickly adjust exposures.

For example, if an insurer wants to add corporate exposure, it may be difficult, depending on the size of the insurer and how it operates, to source 100 different corporate bonds, some of which may not be readily available. , said Mr. Fayvilevich. Buying an ETF makes it much easier to add such exposure, he said.

Besides the general trend of increasing exposure to fixed income ETFs, the regulatory change in New York gives a “boost” to insurance companies which, for example, might hold a certain level of Fixed-income ETFs, but, for “vital reasons”, maybe they didn’t hold up as much as they wanted, Fayvilevich said.

Still, ETFs aren’t without risk, he said. For example, in times of crisis, the value of the underlying assets of a corporate bond ETF could fall, but the value of its stocks could fall even further. That’s a risk for investors who might be looking to sell at that time, Fayvilevich said.

“I don’t want to paint too rosy a picture,” he said.

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