Invesco Ltd. (IVZ) Earnings Call Transcript & Summary

And welcome to today's webinar. My name is Lynn Bachstetter. I'm the Global Head of Financial Institutions here at S&P Global Market Intelligence, and I welcome all of you as I moderate today's panel on annual ETFs in general accounts. We have a great session prepared to you as our panel of experts review the sixth annual report as well as the evolution and the use of ETFs in insurance portfolios. I just want to go through a few housekeeping items. If you have any technical issues or any questions throughout the webcast please utilize the Q&A widget on the right-hand side of your screen. We also will be doing some live Q&A questions. So throughout the presentation, please enter those, and we will leave about 10 to 15 minutes at the end of this presentation to get through as many as possible. We also will be sending a survey at the end of this. As you may know, this is our sixth one. We also have a bunch of webcast at Market Intelligence and Index do collectively. So we love your feedback. And we also will be sending the slides as well as a replay in an e-mail to follow. I also want to remind you, Raghu Ramachandran will be going through his annual report at a high level, but his report and some other white paper and great information is available in the resource widget. So now let me introduce our panelists. Raghu Ramachandran is the Head of the Insurance Asset Channel at S&P Dow Jones Indices. In this role, he is responsible for applying S&P DJI resources to solve problems for insurance companies. Raghu works on how indices are used to create innovative products for insurance companies, benchmarking general account portfolios and the use of ETFs by insurance companies. Chris Marx is a Managing Director and Head of Institutional Insurance. He is responsible for institutional business generation and client management for insurance companies and financial institutions in Americas at Invesco. Eric Pollackov is the Global Head of ETF Capital Markets for Invesco ETFs. In his role, Eric proactively develops relationships with sell-side trading desk implements capital market strategies for Invesco's ETFs and develops and measures the success of client business plans. And last but certainly not least, is Mitch He. He is the Chief Investment Officer for Baltimore, Maryland-based Chesapeake Employers' Insurance Company. He has over 17 years of institutional investment management and capital market experience. He is responsible for Chesapeake's Employers' investment department, leads the company's internal and external managed investment portfolios and advises the company's Board of Directors on investment strategies to maximize risk-adjusted performance. A quick disclaimer. As a reminder, all discussions are based on Mitch's personal opinion and do not represent official view of Chesapeake Employers' Insurance Company. So as I said, we want this to be an interactive session. So I have a few questions presented to our panelists. But please use that resource widget to submit any questions that you may have. But let's start off with our first polling question. Does your company currently invest in ETFs? This will help gauge the audience. Yes; no, but thinking about using ETFs; no, don't have plans to use ETFs; and not applicable. We'll give you a moment to submit your response. [Voting]

Oh, great. That certainly has gone up over the year. So about 50% of our population is currently using or investing in ETFs. So with all that being said, I'm going to turn it over to Raghu, who's going to review his sixth annual ETF investment paper for insurance companies.

Thanks, Lynn. So Roger, if you go to the next slide. As Lynn mentioned, the full papers in the resource widget, 64 pages, I'm not going to go through all 64 pages, let alone all the information in those 64 pages. But at a very top level, insurance companies continue to increase their use of ETFs. The AUM grew by 18% last year. I mean it's now at 34 -- sorry, $37 billion. If you go to the next slide, Roger. In the next slide, we look at the consistency of the growth. So the light blue line is the actual AUM and it's a linear regression in the dark blue line. And what's interesting or surprising is for the last 17 years, that growth rate has been fairly consistent. In the next slide, we look at compound annual growth rates over different periods, 1, 3, 5, 10 and then since 2004, when the insurance companies first started investing in ETFs, and you see they're pretty consistent. And on the table on the right-hand side, we convert these compound annual growth rates to a doubling period, and we see that insurance companies are doubling their ETF usage roughly every 4 to 5 years. And again, this is something that's been consistent for a long time. In the next slide, we look at the flows. This is something new that we did this year when we looked at the actual trading of ETFs and the amount of money coming in and out of the overall insurance investment portfolio. And the dark line in the bottom is the 0 level. And you see insurance companies have been adding billions of dollars to ETFs over the years. Last year, they added $4 billion. An interesting thing, if you, in the paper, go back and compare this to the AUM growth, you see that in 2019, insurance companies were flat to slightly negative in terms of adding money to ETFs, but AUM grew by 19 -- 16% in 2019. In 2018, we see that they brought in about $2 billion, but the AUM went down. So this allows us to differentiate, but we had actual movements of money into portfolios versus appreciation in the actual investments. In this slide, we're looking at the use of ETFs by the size of the insurance company. So we divide it up into small, medium, large and mega. The blue vertical bars show the amount of assets invested by companies of a particular size. Obviously, large companies have more assets, mega companies have more assets. So they don't invest as much as a proportion of their assets as ETFs. But as an overall number, that is a larger number that they're presenting. The dark blue line is the percentage. Here -- sorry, you're right, Roger, go to the next slide. So here, we're looking at the growth of ETF usage that $37 billion, broken up by size of company on the left-hand graph. And you see starting around 2015, the sort of darker purple-ish line and the yellow line, which is the mega and large companies have started to really increase their assets going up. But we also see growth in all sized companies. What I think is interesting is from 2015 to 2020, the last 5 years, [ overall the dip ] AUM went up about $20 billion, about $10 billion of that came from mega companies, mega-sized companies. On the right-hand graph, we look at the percentage of companies in a size bucket that is using ETFs. So we see small companies at the bottom have been growing. Large and medium companies have been also growing. But mega companies have been fairly constant. So about half of the mega companies use ETFs, but they're getting more comfortable with that. And now we're seeing that they're actually using that a lot more. And I think as mega companies get comfortable, other companies also are getting comfortable using ETFs in their portfolio. In the next slide, we look at it by type of company. The light blue line on top is property casualty companies. They were the first ones to invest in ETFs and have grown considerably. Starting around 2016 or so, life companies, which is the middle line, the darker blue one, started entering into it for a couple of years, they hadn't really increased their ETF usage. But last year, they came in and increased used ETF usage substantially. And on the next slide, we look at these companies by type of business they're writing. On the left-hand side, for property casualty and on the right-hand side for life insurance companies. In property, we see that personal writers that have done the most in terms of ETF usage and commercial writers are growing, but they're a much smaller portion. Reinsurance dabbled with them a bit, but basically have pulled out of using ETFs at all. On the life side, it's a little bit more diverse. There's a lot more bumpiness in the lines. But you see that the yellow line, which is life insurance companies, has a little bit more steadier when the lighter blue line that grew up really fast, fell and then come back again as annuity writers, which are the largest portion of life insurance companies. In the next slide, we look at ETF usage by asset class. So this was one of the interesting things is that insurance companies invest most of their assets in fixed income. But initially, and still the largest allocation of ETFs is to equity ETFs. In part, that had to do with RBC factors and substitution doesn't have a cost to it. But we see that life insurance -- sorry, the fixed income has come back into the play. And in fact, last year, fixed income ETF usage grew by 52%. So -- and I think Eric and Chris will get on to a little bit about how some the market volatility was involved in getting people to use ETFs. In the next slide, this is interesting in just sort of how insurance, I guess, is different than the rest of the market. Here, we're looking at sector allocation for sector ETFs versus the overall market. So the dotted yellow line is the sector allocation of the overall equity market as looking at the S&P Composite 1500. So the total market, the light -- sorry, the darker blue line is sector ETFs for the overall U.S. ETF market and then the light blue line is the use of sector ETFs by insurance companies. And you see how they're all different. Both the market is different from -- sorry, the ETF market is different in the broader market. And the U.S. insurance market is different than the U.S. equity market. Next slide, Roger. And then in terms of fixed income, here, we're looking at on the left-hand side, use of ETFs by type of bond. And on the right-hand side is the overall U.S. ETF market by type of bond. And you see the treasuries are a large portion of the overall market, that's the yellow slice. That's not a big portion of that. In fact, most of the usage by insurance companies has been in corporate ETFs with a slight allocation to broad market ETFs. Roger, on the next slide. And then here's that graph over time period. So you see that as insurance companies started using fixed income ETF, it has really been just more in the corporate ETF market with broad market and treasury trailing substantially behind. And I don't have it here, but it's in the presentation -- or it's in the paper, we also look at by asset class, and it's also mostly investment grade, but insurance companies have a higher allocation to invest to high yield than the overall U.S. ETF market. In the next slide. So one of the -- the holding -- things holding back the use of fixed income was the book value accounting that you have in statutory reporting. So several years ago, the insurance industry ETF market came up with the idea of systematic value, which was adopted by the NAIC. 2017 was the first year that insurance companies started doing that. And we see over the last 4 years or so, the average amount of fixed income that's classified as systematic value has stayed roughly around a quarter percent -- sorry, 25%. So even though that helps in the accounting -- or statutory accounting, the use of it by insurance companies hasn't really expanded beyond a quarter of their fixed income usage. And then in the next slide, we look at -- there's a portion of the ETFs that are smart beta. So by smart beta meaning that most ETFs are market-weighted ETFs, there are some that use different factors to do that. And about the only factor that insurance companies have consistently used is dividend ETFs, dividend equity strategies. Really, that's a function -- income substitutions are using equities to drive yield. So that's been the use of that. And then in the next slide. So this is one of the things that was new this year. We looked at the amount of ETFs that are traded in a given year. Up until this report, we only looked at year-end holdings, we were looking at trading throughout the year. And we see that in 2020, $63 billion was traded by insurance companies throughout the year. And that's been a number that's been growing consistently for the last 6 years or so that we went back and pulled data for. In 2020, that number grew by 10%. In the next slide, we look at it by the type of companies trading. So obviously, P&C companies have more invested in ETFs than life companies and health companies are behind. So that's surprising to see the yellow health line at the lower end of the graph. But we see that life companies, even though they don't hold as much ETFs as insurance companies, they are as active, if not a little bit more active than P&C companies in terms of trading ETFs throughout the year. In the next slide, We look at it by asset class. And again, here's an anomaly. We saw earlier that most of the holdings were in equity ETFs. What we see in terms of trading that there's substantially more trading done in terms of fixed income ETFs. And then starting in 2019, it's actually exceeded the amount of trading in equity ETFs, even though fixed income is a smaller portion of the overall allocation. Go to the next slide. And so what we did is we calculated this thing called the trade ratio. So we look at the amount of securities traded in a given year relative to the amount of assets held at the beginning of the year. And consistently, for the last 6 years, that's been about 2.0. So that is insurance companies trade roughly twice as much ETFs in a year than they held at the beginning of the year, and that number has been fairly consistent for some time now. But if we go to the next graph, a couple of things that strike out. So the top line is that life insurance companies trade more frequently than property and casualty companies. And you can see that 2.0 line is sort of right where the light blue P&C line is. The P&C companies have been fairly consistent in trading. Light companies have also been fairly consistent in trading, but at a much higher level. So life companies turn over their ETFs much more frequently than P&C companies. But I think the -- for me, one of the surprising things coming out of this was the trade ratio as applied to asset class. So the dark blue line on top is fixed income. The light blue line in the middle there is equity. And you see that equity never gets above 2.0, and fixed income never drops below 2.0. In fact, last year and then even in prior years, it's been trading roughly 4x the amount that they held at the beginning of the year. And then in the next graph, another thing that I found surprising when we first looked at trading analysis. So the NAIC reports trades in 3 different schedules. There's purchases, sales and then there's buys and sells. Those ETFs that were bought and sold within the calendar year. And we see that, again, fairly consistently, historically, roughly 50% of all ETF trades were a full round trip within a given year. So companies are using that more tactically than I think I would have expected. Go to the next slide, Roger. So one of the things that we're going to look at here is on, okay, so if you're doing all these trades in 2020, about 8,000 trades were done by insurance companies. What is the average size of that trade? And one of the things we find is that the skew in that is substantially different. The mean trade is -- and we'll see that in the graph in a bit, is roughly 20x larger than the median trade, median being that half the trades are below the median and half the trades are above the median. So there's a big skew in the curve. And I put this graph up here because as we go to the next slide, you'll see it's on my graph and it doesn't really stand out the scale different with that. The light blue line against the left vertical axis is the median trade, and that has increased over the last 6 years or so, and now it's roughly $8 million per trade. The dark blue line is up -- sorry, not yet, Roger. The dark blue line is the median trade, which is against the right vertical axis, and that's a little over $400,000. So a big difference in the scale that doesn't show up in here, but also that these numbers have been growing sustainably over the last 6 years. Next slide, Roger. And again, when we look at it by company type, we see also interesting differences. The left side is mean trade. The right side is median trade by company type. Again, we see the life companies trademark. They also trade in bigger chunks. And you see that pop up in 2017 and they stayed below consistently. And also on median trade, so the P&C companies are doing fairly consistent trades. Then all of a sudden, last year, life companies, even the median trade, popped up substantially. And then the next slide, Roger. We're doing the same thing by asset class. Again, we see that equities which aren't traded as much, have fairly consistent size. Life -- fixed income has much substantially higher mean trades and substantially higher median trades, especially the spike in 2019, which dropped a little in 2020, but it's still higher than what it is for equity trades. And then finally, just geographically, where assets are distributed. So on the left side, we see by looking at the domicile of the insurance companies, where they're buying assets, the darker states are where there are more assets of Texas, Illinois, New York, New Jersey. And then on the right side, what we're looking at is the difference in the allocation between how much a state has versus how much invested assets belong to those same companies. So if you see a dark state like New York and New Jersey, proportionally, they're investing more in ETFs than there is invested assets. And then the lighter states are states where they're investing less in ETFs than proportionately than they have in invested assets. And obviously, the one thing that stands out is that New York is on top on both graphs. So with that, I'll turn it back over to you, Lynn.

Yes. Thank you. I guess just a question to conclude your portion would be -- obviously, you did a ton of analysis, right? So can you pick one thing that was the most surprising trend or outcome about the data that you have reviewed?

Yes. I mean starting last year, we started doing quarterly trade analysis. And we knew that there was a lot more trading going on than we had seen before. I think the one thing that struck out to me, especially the scale is the amount of the trade ratio of fixed income and relative to the trade ratio for equities that companies are trading that much in fixed income every year. I think it's probably the number that stuck out of me most of all the numbers in the paper.

Great. Thank you. Okay. Before we move on to our next segment, let's do our second polling question. So what is the primary use case for ETFs and an insurance portfolio? Source of liquidity, ability to quickly gain/lose exposure to sector, tactical asset allocation or deploy cash while sourcing cash bonds. We'll give you a moment to answer the question. [Voting]

Okay. So it looks as if majority are saying, it's kind of a split, I guess, between ability to quickly gain/lose exposure to sector. And then close behind is tactical asset allocation. Okay. So for our next portion, I'm going to kick it over to Chris, Eric and Mitch, and they're going to walk us through the evolution of ETF use cases by insurers.

Yes. Great. Lynn, thank you so much, and thanks for having us today. Raghu, your -- the work you've done on the analysis of ETF usage with insurers is fantastic and super helpful. And in particular, I think what you've done this year, incorporating flows and trading data, just further helps some of the use cases for ETFs, specifically around fixed income. But if we take a quick step back. Historically, ETF flows have been driven by sort of more noninstitutional investors, retail, wealth platforms, adviser networks, et cetera. What we've seen across our business on a global basis is the significant flows and adaptation by institutional investors around the world, utilizing ETFs in their portfolios. And driving these flows, which have been, quite frankly, fairly massive, are just the basic advantages of ETFs, right? So low cost, liquidity, diversification and transparency. And all that, as it relates to insurance, plays into the use cases, right? And the use cases in the polling question are exactly the things that we're seeing, right? So whether it's efficient core investment-grade fixed income access, it's targeting specific asset classes that are hard to reach, whether it's -- I don't have critical mass for a separate account or I don't have an internal capability in a particular asset class. So think bank loans, think EMD, et cetera, or whether it's just cheap access to beta. We're putting cash to work. We're optimizing the cash portfolio, cash plus portfolio. Those are all the types of things and types of conversations and use cases that we're having with clients, and we see ongoing within the insurance community. And I think what -- that momentum has continued in 2020 and currently. And I think one of the most important things that we saw last year, and this was evidenced clearly in the times of volatility. And I think back to last spring, last March with a lot of the COVID driven activity in the market is insurance companies and the demonstration of fixed income ETFs is an increasingly popular tool to access markets with less worry about liquidity. And we saw this last year, we're going to talk more about it, and some of this came out in some of the trading data, and Eric will speak to this. But this chart here, there's 2 charts of fixed income ETF adoption, it's -- it continues to grow. Raghu noted $4 billion of flows within fixed income over the last year. And I think it's -- we're on a trajectory to have it, while it's still on a relative basis compared to total fixed income compared to total assets, it's still a very, very small percentage. I think as ETFs are proving themselves in times of volatility, I think the ability to account for them in a more bond friendly book value type format is only furthering the usage of ETFs and fixed income ETFs. I'll pause there. I don't know, Eric, if you want to jump in on anything on the trading side.

No, I think you did a great job there. And Raghu, your research is killer, too. The one thing that I think is to be clear and if we just maybe go to -- actually, you know what, we're going to talk about in a few slides. So actually, nothing more to add there right now.

Yes. And this stage is just -- I covered some of it, efficient targeted exposure, cash plus, liquidity sleeve. Those are the primary drivers. It certainly, as I mentioned, came out in the quick polling question that Lynn highlighted, but they're not the only uses, right? So whether it's manager transition, whether there's portfolio rebalancing, advertising cash, we're seeing all those uses. But similar to the results of the polling question, this targeted exposure liquidity sleeve, beta access is all really critical and really important with insurers. And quite frankly, the very first polling question of how many are using, there was also a fairly decent chunk of not using but considering. And we're having conversations and sort of there's a lot of sort of education going on. So where might they best fit my portfolio depending upon my business, my liquidity profile, my liability profile. If you think of ETFs in aggregate, they're just additional set of tools to be put into the toolbox. And I think CIOs, I think boards are all thinking about how can I best use ETFs in conjunction with everything else that I'm using across my portfolio.

Yes. I think that's right, Chris. I mean -- and if we just take a step back and just think about what has happened, let's call it since the financial crisis with regards to the fixed income marketplace. Due to the vocal rules and other constraints on banks holding on to actual bonds and inventory is declining because of that because of the way they're treated as -- on their balance sheet. The ETF wrapper has become just a much more efficient vehicle, not even -- not just for insurers, but for any type of investment, right, where you can bundle these actual bonds into 1 equity-like security that you can trade via an exchange or over-the-counter platform. So I do believe that outside of the things that we have here, the ETF technology has just made investing into things like bonds or municipal bonds, for example, much easier. And I think that's why it's much more attractive to not only insurers, but to average investors as well. And we've seen the proof in the pudding with regards to just the growth of ETF assets, particularly in the fixed income arena.

Great. Maybe I'll -- Mitch, maybe I'll ask to you just on -- so as someone that utilizes ETFs, maybe you can make a couple of comments on how you think about ETFs, how you think about use case, how you worked internally with your investment committee to implement.

Yes. Absolutely. Yes. What you and Eric just mentioned, those make total sense for insurance companies. Maybe I will find more ways to take advantage of ETFs in our portfolio to today's webinar as well. But in our case, we currently use only fixed income media apps to quickly gain or adjust sector and duration exposure within our internally managed fixed income allocation. It also serves as a complementary and opportunistic investment tool for us.

So if we go to the next slide, yes, sorry, right here. So when we think about -- actually, go back one, I'm sorry. Thank you. So this looks really big, right? But there's a couple of things to point out here that I think are interesting. First off, fixed income passing, and Raghu mentioned this earlier, equity traded volume by insurers for the first time in the last couple of years. I think that's an important aspect of it. And I do believe that March and April of 2020 has had a lot to do with some of this shift. But let's put some of this into context for example. So this looks like a lot of turnover by insurers. But the reality is that they are generally -- and Mitch can talk to this as well, much longer-term owners of exchange-traded products. So while this looks like $30 billion in fixed income and approximately $25 billion of turnover in ETFs by insurers, the reality is, is that, for example, at Invesco, we managed [indiscernible], on a daily basis, that product alone trades about $14 billion a day. And if you look at the overall marketplace for exchange-rated products per day, the average daily volume notionally is about $1.3 trillion, $1.5 trillion. So there's that much turnover. So I know these numbers look potentially large for an insurance company, which you would consider to be a conservative long-term, buy-and-hold investor, they are actually quite small in the overall concept of overall ETF trading. So next slide, we can go on to -- again, we talk a lot about the events of March and April of 2020, right? So in March, you've got basically a 7-sigma event, meaning that the market moved so violently and rapidly, you would expect that most people and particularly in the insurance space would be huge net sellers during that time period, but you can see while there was some selling pressures occurring in March in that middle area there of this graph, you can also see that there were net purchases as well even as the investment-grade corporate bond index essentially collapsed in the course of 2 weeks. And then you can also see that as the U.S. government stepped in, in early April, at least announced that they were going to step in, in late May -- excuse me, late March, and then actually started to execute sometime in April, you can see that the buying returned. So I think it's an important aspect to kind of understand that from insurance companies, they weren't these huge net sellers that we would potentially maybe expect them to be, but it actually looks like there was some buying activity included in their overall net kind of positioning for corporate credit ETFs. Mitch, I don't know if you -- what your experience was during that, but maybe you can comment on what you saw.

Yes. Definitely, we purchased our ETFs, fixed income immediately after that process. But we are in a little bit different situation. During the height of the crisis, we do want to keep our cash level high. So that's a consideration. We didn't buy exactly at the dip, but I think that's a very good opportunity. And also just goes back to Eric, your prior point is that really insurance companies with internal trading capabilities using ETF can help us alleviate some of the other size constraints in our bond trading activities post the great financial crisis with much less inventory and low interest rate environment, every high-quality bond issuance with decent yield was massively oversubscribed. So that's ETF definitely is helpful in that case?

I think, Mitch, that's a really critical point because -- so when you look at the data that Raghu walked through, right, you look at the usage of sort of midsized and smaller companies. And that's just accessing corporate credit on the CUSIP level is increasingly harder, right? And so the ability to do that in a fairly liquid way, an express room view via a fixed income credit -- corporate credit ETF is something that is really driving a lot of the activity in use case, primarily.

Yes. And then I just think finally, to kind of maybe button up this slide, if we think about the universe that insurers have access to, right, particularly in the fixed income space, if we think about fixed income assets in the U.S., it's about 19% of the $6.2 trillion pie as of last week. But in the sheer number of products, though, it's around the same. It's about 18% of the 2,500 products that are listed in the U.S., about 18%, about -- just under 500 are fixed income. But then you need to drill down into just which ones are NAIC-weighted for people like Mitch to actually have access and the capabilities to invest in. And even there, they have their own parameters on which ratings that they would accept inside their portfolios or not. And that whittles down to only about 150. So again, when we look at these numbers and they look so large in terms of share turnover, the reality is that the access that insurers actually use in the fixed income space is relatively small to the overall ETF marketplace. So Chris, do you want to take the next slide?

Yes. [indiscernible] Yes. Yes, go ahead. Go ahead, Lynn.

Yes. Right. Let's do our last polling question, just to make sure everyone is awake and answering questions as we go along. So what is the biggest challenge to using ETFs in an insurance portfolio? Accounting regulations, statutory regulations, management board's understanding of ETFs, concerns about the structure of ETF or don't know how to effectively trade ETFs. We'll just wait for those responses to come through. [Voting]

Should I push it live to see where we are?

Lynn, I think we have some glitch in the system, so we can come back later for the results.

All right. Any hunch as to how you think you guys think they'll respond to that, the next [indiscernible]?

Yes, Mitch, maybe do you want to use sort of your own experience at Chesapeake on sort of getting ETFs approved and used? And maybe I can chime in on some of the things that we're seeing from conversations we have.

Sure, yes. So definitely, I think, it's -- from my vantage point, I would say, it's more of the administrative issues that are serving -- are some of the challenge for ETF usage especially the medium and smaller insurance -- the big insurance companies, they definitely have other resource that they can tackle these things. But as a statutory-only filer, we prefer the systematic value accounting treatment. So we can carry relevant ETFs on schedule [indiscernible] one as at the systematic value to reduce the mark-to-market price volatility, as long as the bond ETF is investment grade. However, that systematic value accounting requires the proper future cash flows to be fed into the insurance investment accounting system, which may not be a straightforward process at times. But there are multiple parties like the insurer that's third-party cash flow agent accounting provider, if you outsource your investment planning. These are involved to make that happen. Of course, the insurer itself can also make that systematic value and book value calculation on a spreadsheet to say, but that is a lot of manual updates and it's not really realistic idea for most companies. So I would say for an insurer who wants to invest through ETF, check with your accounting team or outsource the accounting platform to make sure the relevant cash flows would be available and can be fed into the system periodically. And the second one is on the NAIC rating filing requirement from the ETF apps, that's another potential hurdle. Although NAIC has a list of bond classification ETFs. The rating on those listed bonds are only preliminary. So each individual insurer need to file each ETF with NAIC to be able to obtain a final rating designation. So not -- again, not every medium-, small-sized insurance companies is willing to do that. So I think that's the two from more of a practitioner's standpoint.

Yes. So Mitch, I think there's -- what you articulated is very similar to some of the things that we're talking to other insurance companies about, right? So the responses here in this polling question, I certainly agree with. I think I would say just from experience that we've had like accounting would be a bit higher. I think, first off, on the systematic valuation, certainly a big advantage as we've talked about. But it's not -- you have to choose it when you're filing. So it's not a default option. So you have to proactively do it. That could be holding some back. Mitch hit on some of the key points right, is like you have to get the cash flows from the sponsor. And there's just certain mechanisms that you have to walk through to get to systematic value. But -- and it seems almost a little daunting but in reality, it's -- we haven't found it particularly difficult. It's just a couple of extra steps that you need to do. What we see, particularly is just the understanding of ETFs, how they work, just different use cases from a sort of an investment community board level, right? They may be -- they haven't been in the portfolio. They aren't included in my IPS or portfolio guidelines. And so there's questions about sort of how they work both from accounting, statutory requirements and quite frankly, just behavior requirements, behavior in this stress scenario. I want to see more data. I want to see performance. I want to see just trading activity in a period of stress. And I'll just link that back to what we saw last year in fixed income ETFs during a period of sort of extreme stress in March, where I think ETFs, fixed income ETFs sort of held up very well, and that's on the heels of 10 years ago, the GFC. So I think all these things are pointing in the right direction to continue to build momentum in ETFs. But I think we all acknowledge that there are certainly some hurdles for widespread adaptation.

Yes. And I just quickly want to -- while it's still on the screen, so everyone understands where their peers and the rest of the audience felt about this question. So obviously, it's heavily weighted towards statutory regulations being the biggest challenge.

Yes. Yes. And just -- let me just -- I'll just touch on this and maybe I'll also ask Mitch and Eric to chime in. I think one of the things that really has changed in the ETF -- the broader ETF landscape over the last several years is I had mentioned at the beginning, just the emergence of sophisticated global institutional investors, right, whether it's pension funds, whether it's endowments, foundations, whether it's insurance companies, right, participating in the ETF -- in ETFs. And that's a great thing because different investors have different motivations, right, that drive their behaviors. And I think a critically important takeaway is the diversity of the user base and the diversity of the investor base is absolutely critical to how ETFs are functioning, right? So there's -- in times of stress, there's certain investors, right, in the retail space that will immediately try to exit, right? Insurance companies, very different behavior, right? Very different time horizon, very different liquidity profile, very different liability profile. And so those trade off each other. And what we tried to do here was just sort of highlight some basic -- sort of basic sort of types of behaviors if you're an ETF owner. And you could see where insurance companies live, right? And this is not to be an exhaustive list, right? It's just we tried to just illustrate the diversification of ETF users, right? So you see insurance companies can be tactical, right, and choose current companies can be opportunistic, insurance companies are using it as a liquidity tool. So those things all play into sort of the functioning of the ETF market, which, again, goes back to what are the perhaps some of the things that are holding back wider usage within the insurance community. But Mitch or Eric, I don't know if you -- if you have any comments.

I would just say, definitely, we currently use as more of a strategic/tactical allocation to and also opportunistic buyer. I can see ourselves as more of a buyer at a time of stress.

Okay. Yes. No, nothing to add there. I think that's -- it's a great slide. And the technology, right, is just infiltrating all different types of investors, I think it's the point. And the wrapper has just become the choice for even insurance companies now going forward?

Yes. I mean I think -- listen, I think sophisticated investors are looking at how they can use technology, how can they use a wrapper to efficiently access a particular asset class. And they're always trying to do it better, get access in a way that maybe they didn't have that access 2, 3, 4, 5 years ago. And I think that this is clearly going to continue to grow and grow at a fairly rapid pace. And I think there will continue to be some evolution, right? I mean we're talking primarily about fixed income ETFs. And the fixed income ETFs are primarily investment-grade credit focus, some high yields, some munis, some EMD loans, et cetera. But when you take a step back and look at ETFs more broadly, I think there are things, smart beta, thematic ETFs, right? So whether it's commodities, clean energy, ESG, whether it's laddered or bullet-type ETFs, I think all those things, there's not a lot of activity currently. But I think if I look at down the road 2, 3, 4 years, I think there's going to be meaningfully more usage within those types of exposures.

Totally agree with that. And I think the ETF world experienced a real-life stress test during the 2020 pandemic, that could really increase account level among insurance companies. And I also believe, Chris, you just mentioned that the more thematic focus the ETF sector-focused during than different credit quality will help to provide flexibility for insurance companies to choose from.

Yes. I mean these are things that we see across our business, right? I mean we have approaching $350 billion in ETFs globally at Invesco. And I think we're doing innovative things. I think not only in fixed income, but clearly away from fixed income in the equity space. And there's a lot of momentum. And I think that will certainly be trickling down at some point into the insurance community.

Yes. So finally, I think when we talk about volumes. We talked about an ETF landscape, we talked about 2 different kind of volumes. There's primary market activity, which is creating and redeeming ETF shares. And then there's secondary market trading, which is what occurs on an exchange that you see on CNBC or Bloomberg, et cetera. But we've looked at -- in this slide here in the top portion of it is really just around flows versus volume, right? So we see spikes in volume in late April, early March and then you compare that to flows. And you can see with the bottom graph that if you subtract flows from volume, positive arena. And so what we're saying here and trying to get accomplished is just understand that there are many different types of investors that are absorbing some of these flows. So not every trade that occurs results in sort of a creation or not every trade that occurs it results in a redemption. And the point here, though, is that I talked a little bit earlier about was the inventory levels of individual corporate bonds is what we're trying to talk about here is so low that the ETF has become this additive layer of liquidity for all different types of investors, including insurance companies. So that's what we're trying to talk about quickly here that really that secondary market ratability of a corporate credit ETF is really helping absorb some of the flows that are occurring in the primary and second -- in primary market, specifically.

Great. I think that -- does that bring us to the end of your prepared slides?

Yes. Yes, Lynn. Yes. We can -- if we want to move to some questions. Let's go ahead.

Yes. There's been a few questions first. So let's do that and then if you have to circle back, we can. So one of the questions, just maybe to level set things, Raghu and Mitch, I think you guys would be most appropriate to answer this. Where -- we spoke a lot about regulation and mentions NAIC. So where does ETF sit in the blue book filings?

I'll tell you where I look for it, which is in Schedule D, right? So Parts 1 and 2 for the holdings and Parts 3, 4 and 5 for trading. Most ETFs that the insurance companies are using -- I think all ETF insurance companies using either is classified as equities. And if they go through the NAIC filing to get the ratings, that would show up as bonds. But there'd still be Parts 1 and 2 for holdings and 3, 4, 5 for trading.

Okay. Thank you. Question, Mitch, I think you would be best to address this. Why didn't do you expect insurers to be net sellers last March? Due to premiums continuously coming in, they tend to be buyers during crisis periods.

Yes. In our case, and really from our vantage point, I don't really see us more of a buyer in the time of crisis. I think the market definitely provided opportunity for insurance company to get into the different asset class that they would want to gain more exposure. Typically, insurance companies as long-term investments. So the crisis really does not do a lot of -- encourage a lot of trading just because we are in a time of crisis. But the buying opportunity presented itself, I do think we are more of a buyer in that case.

Okay. So I guess, Raghu, on the same note, we have seen a large growth in trading volume. Maybe you could talk a little bit like where do you see this going for the rest of the year and into next year?

Yes. So starting last year, we started doing quarterly trade analysis, and we'll -- to do that again. So I think insurance companies had to file last week or first quarter, and we won't get that data for a while. But if we just extrapolate historical trends, if we see 2x in trading volume across all ETF holdings, that would imply somewhere around $74 billion traded this year, which would be a 17% increase. If we were to look at it in terms of fixed income and equities and apply those ratios, I think Eric talked to 1, 3 on equities 4x on fixed income, that would apply -- imply around $83 billion traded, which imply a 30% increase over last year. So we're looking at somewhere in that range, possibly for trading volume in this year. And we'll sort of give first indications to that mid-June or so we will get the first quarter numbers analyzed. Eric, I don't if you have any thoughts on what you're seeing?

No. I love actually the fact that you're pulling that data specifically just for the insurance channel. In the U.S., it's generally very difficult to kind of figure out all trading volumes and attribute them is the more difficult part. So the fact that you're pulling that is very helpful.

Yes. I guess maybe, Eric, just while you have the mic, talking about trading. What trading patterns and trends have you seen from your vantage point, working with both end allocators and market makers, other intermediaries? Can you just talk about trends that you're seeing?

Yes. So I think in the corporate bonds and space specifically, and I'll just -- I'll go there first. What has traditionally always happened and has always occurred is what we call portfolio trading. So basically, you would call up a bank or a liquidity provider and you'd say, "Hey, listen, where can I buy this 100 list of -- 100 bonds list, and I'm going to e-mail to you," right? And that -- the e-mail would come, they'd open it up, they look at the bonds, they figure out credit risk, duration, prices, indicative. And then this would take time, and that kind of process, though, has become almost purely electronified at this point. And that return now is done in seconds because the liquidity provider community has figured out ways to build models that can actually price those bonds relatively quickly. So that has really been a huge benefit to the ETF industry specifically. The rise of RFQ platforms or request for quote platforms where essentially where you can own this service on your desktop, and you can actually put a trade in there that says, "I want an indication of interest or a market on where I can buy $10 million worth of a bank loan ETF." And that system will send that order or indications out to multiple liquidity providers, which will give you back a price at which point you can execute upon. So it's become much more electronified and less of a phone call in these days when it comes to transactions. That has been a huge benefit to the exchange-traded fund world specifically with the rise of what we call the RFP platform. And I know that -- Chris mentioned this already. In the United States, the ETF business was built on a back of a registered investment advisers. That continues to still be the story as they dominate much of the assets here. But as we've seen in some of the slides today, insurance companies, institutions, et cetera, are starting to tilt that away from just what we call traditional retail. And 10 years ago, it was probably 70-30 with regards to ownership by RIAs and down, that's almost at 50-50 at this point. And in some instances, you could actually go the other way towards institutions like insurance companies and pensions. So those trends, though, are tend to be chunkier flows, which tend to be bigger blocks of trading. And therefore, the balance sheets of trading firms has to get significantly larger because of those trends.

Okay. Thanks. Raghu, for you. Do you believe there is appetite for actively managed strategies in the ETF wrapper from the insurance channel? If so, why or why not?

Well, I can maybe talk about what they're doing, and I'll defer to Chris -- Eric on why, why not. But what we've seen is there's only one place where we've seen active ETF use, and that is an ultra-short bond ETFs. So almost all the ultra-short bond ETFs that are either held or traded have been active to the exclusion of nonactive ultra-short ETFs, bond ETFs. But across the board, that's the only place that we've seen active ETFs used by insurance companies.

Yes. The only -- I would absolutely agree with that, Raghu. And the only thing I would just add is I think that's potentially an area that we'll see some greater interest in is factoring into this sort of just what do insurance companies want to get out of utilizing that ETF, passive versus active. If it's active, insurance companies certainly want to know what they own. How does an active ETF compared to a passive ETF fit into their guidelines, credit limits, things like that, right? So that has to all be taken into account. I think that's a second or third order sort of outcome at this point. So I'll leave it there.

Yes. I agree, Chris. I'm sorry, Lynn.

No, go ahead.

We do manage -- actively managed strategies here, including short-term duration, like Raghu mentioned. Those adoption rates are going to be relatively tiny with regards to institutional mandates as of right now. But I think over the course of time, to Raghu's point, the short-term part of the curve and where you can eke out basis points of yield by entrusting a fixed income active manager, I think that, that has proven itself to be a benefit for the active space.

Mitch, maybe very quickly, a question was, how should we think about the book yields for ETFs? Will the book yields be reliable for pricing products?

Yes. I would assume that this question when you mentioned pricing products because it's priced in the life or annuity product, I would think for ETFs are reflective of the underlying pool of bonds for that. And so it's very effective. And also if you use a systematic value accounting, that's also very similar to the effective interest rate calculation for typical bonds. So I would say yes.

Great. Well, that brings us to the hour mark. Thank you all for joining. So on behalf of all of us here, we hope you are staying well. Reminder, the resource widget has Raghu's 67-page paper, but it's one of the best. And we will be sending out a replay as well as the slides soon after this concludes. So thank you all. And for those of you celebrating, have a great holiday weekend.