Exchange Traded Funds for Insurers

ETFs can help achieve your general account objectives, with low risk-based capital requirements and bond-like accounting treatment.

In April 2017, the NAIC passed a revision to their Statutory Accounting Principles, specifically, SAP 26, which allows insurers to report their designated fixed income ETF investments at either fair value or systematic value. Systematic value is an accounting methodology, which allows insurers to report these designated fixed income ETF investments in a bond-like manner, as these investments can be amortized from quarter-to-quarter on the NAIC filing. It allows insurers to maintain a lower volatility when reporting these assets for fixed income ETFs as compared to the fair value method.

Invesco Fixed Income Factor ETF Suite

Seven Invesco fixed income ETFs have received an NAIC designation or Preliminary NAIC Designation** from the Securities Valuation Office of the National Association of Insurance Commissioners (NAIC). Fixed income ETFs with an NAIC designation can be reported as bonds or preferred stock by insurers, which allows for more favorable risk-based capital treatment. A Preliminary NAIC Designation cannot be used to report an ETF to state insurance regulators. However, the purchasing insurance company may obtain an NAIC Designation by filing the ETF with the NAIC's Securities Valuation Office (SVO). Contact us to find out how we can accommodate the registration fee on your behalf.

Here are a few reasons why insurance companies may want to consider fixed income ETFs:

1

More favorable risk-based capital treatment
Fixed income ETFs with an NAIC designation can be reported as bonds or preferred stock by insurers, which allows for more favorable risk-based capital treatment.

2

Exposure to non-traditional fixed income sectors
Certain fixed income sectors (e.g. emerging market debt or senior loans) may offer enhanced income opportunities beyond traditional exposures. Accessing these subsets directly requires expertise in the asset class and can be costly and time consuming. ETFs may provide convenient and efficient access to non-traditional fixed income sectors.

3

Liquidity buffers in less liquid asset classes
Fixed income investors face a number of potential challenges such as illiquidity, price uncertainty, and high trading costs. Some fixed income ETFs may provide a more favorable implementation profile than their underlying holdings.

4

Cash management
ETFs are often utilized to equitize cash positions and may serve as an effective stopgap for cash management.

Ticker Fund name Asset class NAIC Designation Inception date
BAB Invesco Taxable Municipal Bond Portfolio Taxable munis Preliminary 1- as of 3/22/2018 11/17/2009
BKLN Invesco Senior Loan Portfolio Senior loans 4+ as of 1/30/2019 3/3/2011
CLTL Invesco Treasury Collateral Portfolio Short-duration treasuries Preliminary 1 as of 9/20/2018 1/12/2017
PCY Invesco Emerging Markets Sovereign Debt Portfolio Emerging market sovereign debt Preliminary 3- as of 3/22/2018 10/11/2007
PGX Invesco Preferred Portfolio Preferred stock P3+ as of 1/15/2019 1/31/2008
PHB Invesco Fundamental High Yield Corporate Bond Portfolio High-yield bond 3- as of 1/30/2019 11/15/2007
PICB Invesco International Corporate Bond Portfolio International corporate bonds Preliminary 2+ as of 3/22/2018 6/3/2010

Fixed income ETFs with an NAIC designation can be reported as bonds of preferred stock by insurers, which allows for more favorable risk-based capital treatment.

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Invesco offers seven ETFs that have been assigned an official or preliminary NAIC designation by the NAIC Securities Valuation Office (SVO). Preliminary designations for BAB, PCY and PICB are as of 3/22/2018, and 9/20/18 for CLTL. Official designations were assigned for PGX as of 1/15/19; BKLN and PHB as of 1/30/19. AUM and effective duration are as of December 31, 2018.

* Preliminary NAIC Designations are the intellectual property of the National Association of Insurance Commissioners (NAIC) and are redistributed here under License. A Preliminary NAIC Designation is an opinion of the NAIC Securities Valuation Office (SVO) of the probable credit quality designation that would be assigned by the SVO to an investment if purchased by an insurance company and reported to the SVO. A Preliminary NAIC Designation is only one of the regulatory factors considered by the SVO as part of its analysis of probable regulatory treatment under the Regulatory Treatment Analysis Service (RTAS). A full discussion of such other regulatory factors is set forth in the RTAS letter provided to Invesco PowerShares Capital Management LLC. A Preliminary NAIC Designation cannot be used to report the ETF to state insurance regulators. However, the purchasing insurance company may obtain an NAIC Designation for the ETF by filing the security and final documents for the ETF with the SVO. The indication of probable regulatory treatment indicated by a Preliminary NAIC Designation is not a recommendation to purchase the ETF and is not intended to convey approval or endorsement of the ETF sponsor or the ETF by the NAIC. NAIC Designations are the intellectual property of the National Association of Insurance Commissioners (NAIC) and are redistributed here under License. An NAIC Designation is a proprietary symbol used by the NAIC Securities Valuation Office (SVO) to denote a category or band of credit risk (Le., the likelihood of repayment in accordance with a written contract) for an issuer or for a security. NAIC Designations may be notched up or down to reflect the position of a specific liability in the issuer’s capital structure and/or the existence of other non-payment risk in the specific security. Under NAIC reporting rules, shares of an ETF are presumed to be reportable as common stock. The SVO may classify an ETF as a bond or preferred stock and assign it an NAIC Designation if it meets defined criteria. For a discussion of these criteria please call the SVO or refer to the Purposes and Procedures Manual of the NAIC Investment Analysis Office. The assignment of an NAIC Designation is not a recommendation to purchase the ETF and is not intended to convey approval or endorsement of the ETF Sponsor or the ETF by the NAIC.

The Securities Valuation Office (SVO) of the National Association of Insurance Commissioners (NAIC) assigns credit quality designations to securities held by state-regulated insurance companies. NAIC designations are opinions of credit quality that range from NAIC 1, being the highest quality, to NAIC 6, being the lowest quality. “P” is a valuation indicator used to classify perpetual preferred stock. NAIC designations allow ETFs to be reported as bonds or preferred stock (as appropriate) on NAIC Schedule D and are used to set risk-based capital (RBC) requirements. NAIC designations only measure credit risk and do not measure other risks or factors that may affect repayment, such as volatility/interest rate, prepayment, extension or liquidity risk. Refer to official NAIC publication and guidance for official NAIC policies and definitions.

Plus (+) or minus (-) symbols are not used to communicate credit risk. Symbols are not official and have no risk-based capital (RBC) or other regulatory implications. The symbols are used exclusively as internal indicators by SVO analysts and disclosed to insurance company investors through NAIC systems. Insurance companies will therefore ignore such symbols for regulatory purposes, reporting only to the NAIC Designation category assigned to the issuer or security without the plus (+) or minus (-) symbol.

** Expense ratios are shown for these funds. The gross expense ratio (%) for BKLN is 0.67%.The adviser has contractually agreed to waive fees and/or pay certain funds’ expenses through Aug. 31, 2019 for BKLN. See the funds’ prospectus for more information.