Some Insurers May Have Taken Bond Market Liquidity for Granted

Resources

The Cerulli report is available, behind a paywall, here.

An article that covers what some life insurers are saying about their annuity operations now is available here.

Just 11% of the financial professionals asked about reasons for not recommending variable annuities cited as concerns about insurers' solvency as a top negative, compared with 79% who listed excessive all-in fees as a major turnoff.

The Cerulli analysts write that some insurers with liquidity concerns have been using exchange-traded funds, or ETFs, to address those concerns.

Insurers ended 2019 with about $31 billion in ETFs, the Cerulli analysts writing, citing S&P Dow Jones Indices data.

"Nearly two-thirds (60%) report using ETFs instead of cash to manage their portfolio's liquidity," the analysts write. "The burgeoning interest in and use of ETFs presents opportunity for providers that can tailor vehicles and present thought leadership addressing the interests of insurers."

Investing in ETFs is one way insurers can prepare for the possibility that, someday, interest rates might start to go back up again, from today's near-zero levels, the analysts write.

But insurers' growing use of ETFs to manage liquidity concerns comes shortly as Antonio Falato, Itay Goldstein and Ali Hortaçsu are asserting that ETFs might suffer from liquidity problems during the periods of market volatility that would make an insurer hungry for liquidity.

The Context

"Liquidity" refers to how easy it is for an individual or company to convert an asset other than cash into cash. Normally, for example, an individual with an unwanted, high-quality diamond ring could easily find a buyer for a diamond ring. In a severe crisis, however, the individual might not be able to find anyone willing to trade a loaf of bread for a diamond ring, let alone pay a price close to what the individual originally paid for it.

Similarly, in the insurance asset management world, insurers normally assume they can convert a high-quality corporate bond into cash whenever they feel like it, and get a price close to what the bond would have fetched a week earlier. In mid-March, however, before the Federal Reserve Board said it would help maintain bond market liquidity, some bond holders were having trouble with selling bonds at what the sellers' saw as acceptable prices.

Since March, the Federal Reserve Board and the U.S. Treasury Department have prepared for the possibility of having to spend tens of billions of dollars, or more, to keep the U.S. bond markets from freezing up.

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