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Year-End 2013 Foreign Exposure in the U.S. Insurance Industry

The insurance industry’s holdings of foreign investments accounted for 12% of cash and invested assets as of year-end 2013. Canada and European Union (EU) countries accounted for more than 60% of the foreign investments. The NAIC continues to monitor these holdings for any shifts that may introduce added risk to U.S. insurer portfolios.

As of year-end 2013, the U.S. insurance industry reported holding total direct foreign investments with a book/adjusted carrying value (BACV) of about $672 billion. These foreign holdings include investments in bonds, common stock and preferred stock. Approximately $116 billion (or 17%) of these foreign investments were denominated in a foreign currency. Canadian dollar denominated investments accounted for the largest portion at about $21 billion, followed by the Japanese yen ($9.2 billion), the euro ($7.5 billion) and the British pound ($5.2 billion). Interestingly, foreign holdings denominated in the U.S. dollar (USD) were about $9.7 billion.

Foreign exposure is defined as any entity that is domiciled outside of the United States. It excludes some of the structured securities that are technically domiciled in foreign countries (such as Bermuda, Cayman Islands and Ireland) for legal and tax reasons, but where there is no obvious exposure to the economy of the respective country. Other structured securities where the risk related to the domicile is not so apparent are included.

Table 1: 2013 Foreign Holdings Summary ($ Mil.)

Table 2: 2012 Foreign Holdings Summary ($ Mil.)

The bulk of the industry’s foreign investments were in bonds at $631.9 billion (or 94%) of total foreign exposure. The total foreign exposure of $672.1 billion was a 3% increase from year-end 2012, which closely approximates the 3.5% increase in cash and invested assets reported at year-end 2013. Life companies increased foreign exposure by 2% year-over-year (YOY) to $531.6 billion, or 79% of total industry foreign exposure. Property/casualty (P/C) was a distant second at 18%, or $121.5 billion of the industry’s exposure as of year-end 2013. Health company exposure increased 17% to about $5 billion from $4 billion YOY. For health companies, an increase of 27% in the foreign stock exposures accounted for the majority of the YOY change. Much of the growth in stock exposure was due to appreciation in holdings. Overall, total foreign exposure increased by about $22 billion (or 3%) from year-end 2012. (See Table 1 and Table 2.)  

Table 3: 2013 Total Foreign Bond Exposure by Sector ($ Mil.)

Table 4: 2012 Total Foreign Bond Exposure by Sector ($ Mil.)

Life insurers accounted for about 82% of the foreign bond exposure, followed by P/C (15%) and fraternal (2%). The 1% of total exposure held by health insurers, while small, represented a 15% increase from the 2012 year-end exposure of $3.8 billion. The largest sector exposure was to foreign financial institutions at $95.7 billion, or 15% of total foreign bond exposure. Exposure to government bonds decreased 10% from year-end 2012, and exposure to ”other” sectors (i.e. corporates) increased 7%. (See Table 3 and Table 4.)

In the financial sector, dispositions and other than temporary impairment (OTTI) accounted for $428 million and $35 million, respectively, of the total $912 million decrease in BACV from 2012 to year-end 2013. The change in BACV of government bonds was due to dispositions of about $2.7 billion and OTTI of about $57.1 million. Currency exchange variations accounted for about $6.4 billion of the decrease in government sector BACV YOY, of which dollar-yen fluctuations accounted for about $5.7 billion.

Largest Foreign Country Bond Exposures

The top 10 countries accounted for 78% of the foreign bond holdings as of year-end 2013, which was the same level as in 2012. In addition, the countries in the top 10 have not changed since year-end 2012. Canada remains the largest single country exposure at about 20% of total foreign bond exposure.

Table 6: 2012 Top 10 Foreign Bond Exposures by Country ($ Mil.)

Table 5 and Table 6 show that the decrease in government bonds was broad, not just limited to lesser developed countries. In fact, the largest single country decrease was in Japan, about $1.6 billion. The insurance industry’s concentration of foreign investments is in larger and relatively “safe” countries. Year-over-year, however, the rating distribution has changed. As of year-end 2012, six of the top 10 country exposures had the highest quality long-term sovereign debt ratings (i.e., AAA/Aaa) from the nationally recognized statistical ratings organizations (NRSROs). The remaining four countries had high-quality long-term sovereign debt ratings in the AA category. As of year-end 2013, there were four (out of the previous six) remaining AAA-rated countries: Canada, United Kingdom, Australia and Luxembourg. The rating concentration for the top 10 country exposures remains investment grade as of year-end 2013, with the lowest rated country (Ireland) at A-.

The insurance industry’s foreign investments in Central America and South America were about $18 billion. About 35%, or $6.4 billion, was in government bonds. The next four largest sectors were basic materials ($3.6 billion, or 20%), financials ($2.3 billion, or 13%), utilities ($1.3 billion, or 7%) and consumer non-cyclical ($1.1 billion, or 6%). Brazil has the largest allocation (about $1.6 billion) of the government bond investments. Argentina exposure was $172 million as of year-end 2013, all of which were in the sovereign bonds maturing in 2033 that defaulted due to failure to pay interest on July 30, 2014. Following this default, Standard & Poor’s lowered its long-term sovereign debt rating on Argentina to ”selective default” from CCC-.

European Union Bond Exposure

Table 7 and Table 8 show a category breakdown (i.e. financial, sovereign and other) of the insurance industry’s exposure to EU countries, particularly the Eurozone, as of year-end 2013 and year-end 2012, respectively. The percentage of foreign bond holdings concentrated in EU countries increased by 4% at year-end 2013 to about $256 billion (40% of total foreign bond holdings) from $246 billion as of year-end 2012 (39% of foreign bond holdings). Most EU investments were within the “other” bond category, at 82%. Furthermore, exposure to countries under the euro currency (Eurozone) increased slightly to $139 billion in 2013 from $138 billion in 2012. Eurozone financial holdings were relatively consistent YOY at approximately $20 billion, while government bond exposure decreased to $1.5 billion from $1.9 billion. The “other” category, however, increased by 2% to $117.6 billion in 2013 (from $114.7 billion in 2012).

Table 7: 2013 Bond Exposure to EU Countries by Sector ($ Mil.)

Table 8: 2012 Bond Exposure to EU Countries by Category ($ Mil.)

Note: The EU is comprised of 27 member states. The result of this analysis reflects only 26 member states as insurers did not have any exposure to Cyprus. The Eurozone consists of 17 member states that use the euro as their sole currency. The 10 other EU members do not use the euro as their currency.

The short-term prospect for euro bonds has not been favorable given the current economic and political environment. The conflict between Russian separatists and the Ukrainian government is far from resolved. Recent economic data shows stagnant growth in the Eurozone, with the highest growth country, Portugal, growing gross domestic product (GDP) at only 0.6%. The three largest economies—France, Germany and Italy— had negative growth in Q2 2014. In addition, the sanctions against Russia are expected to be a drag on these three economies especially, but the effects should be temporary.

Foreign Common Stock and Preferred Stock Exposure

In 2013, U.S. insurers increased overall foreign stock exposure by 10%, YOY, to about $40 billion. (See Table 9 and Table 10.) United Kingdom (UK) domiciled stocks comprised 35% of total stock exposure. The share of common versus preferred stock exposure as of year-end 2013 totaled about $38.2 billion and $1.9 billion, respectively. The largest exposures were to companies based in the UK, Canada, China, Switzerland and Bermuda. About $3.7 billion were companies domiciled in the emerging market countries comprising the MSCI Emerging Markets Index. There was a split performance in the foreign equity markets in 2013. The STOXX Europe 600 Index—which represents large, mid-size and small capitalization companies across 18 countries of the European region—was up by 15% for the year, as of December 2013. The MSCI Emerging Markets Index was down 5% for the same period, but was in positive territory until the Q4 2013.

Table 9: 2013 Foreign Stock Exposures by Industry ($ Mil.)

Table 10: 2012 Foreign Stock Exposures by Industry ($ Mil.)

The largest share of foreign stock is held by P/C insurers with 64%, or $25.6 billion of the total $40.1 billion held by all insurers. Life companies followed at about 33%, or $13.3 billion. The top 10 countries’ exposure to foreign stocks accounted for about 82% of total foreign stock exposure held by U.S. insurers as of year-end 2013, compared to 80% as of year-end 2012. (See Table 11 and Table 12.) The largest increase in 2013 was in stock holdings in the Netherlands (38%), followed by the UK at a 26% increase from year-end 2012. Other notable increases were in Cayman Islands (15%), China (13%) and Switzerland (13%). Only three countries experienced a decrease: Japan (16%), France (7%) and Bermuda (5%). Overall, stock exposure in the top 10 countries was 13% higher in 2013 at $33.2 billion, compared to $29.3 billion in 2012.

Table 11: 2013 Top 10 Foreign Stock Exposures by Country ($ Mil.)

Table 12: 2012 Top 10 Foreign Stock Exposures by Country ($ Mil.)

As of year-end 2013, EU stock exposure was 53% of total foreign stock exposure, compared to 48% as of year-end 2012. The three largest EU foreign stock exposures were in Ireland ($2.1 billion, or 10%), the Netherlands ($1.7 billion, or 8%) and France ($1.1 billion, or 5%), with the majority in the form of common stock. The Netherlands had the largest preferred stock exposure at $108 million. (See Table 13.)

Table 13: 2013 Stock Exposure to EU Countries by Category ($ Mil.)

Note: The Ireland preferred stock exposure in BACV is approximately $303,000. The Malta common stock exposure is approximately $128,000. These amounts are not reflected in the table due to rounding.

Summary

As of year-end 2013, total foreign investments increased $22 billion to 12% of the insurance industry’s total cash and invested assets from $650.3 billion as of year-end 2012. Of that exposure, more than 60% of foreign bonds and 80% of foreign stocks were domiciled in Canada and EU countries. GDP grew by 0.3% across EU countries and just 0.2% across Eurozone countries in 2013. Eurozone GDP is expected to grow by 1.6% in 2014 and 2% in 2015. The projections for Canada in 2014 are much higher, at 2.3% growth in GDP. The International Monetary Fund (IMF) estimates that Latin America and the Caribbean had growth of 2.7% in 2013, with expectations of 2.5% and 3% in 2014 and 2015, respectively. With slow to no growth of GDP in recent quarters in Eurozone countries, the technical default of Argentina, continued conflict in Ukraine/Russia and turmoil in the Middle East, there is much uncertainty regarding the impact on foreign investments in these domiciles. The small size of the U.S. insurance industry’s exposure, however (relative to total cash and invested assets), was mainly to high-quality (lower risk) countries and securities, and was diversified across more than 11 industry sectors.

The NAIC Capital Markets Bureau will continue to monitor the insurance industry’s foreign exposure, as well as developments within the aforementioned regions that could affect these exposures. We will provide updates as deemed appropriate.

Questions and comments are always welcomed. Please contact the Capital Markets Bureau at CapitalMarkets@naic.org

The views expressed in this publication do not necessarily represent the views of NAIC, its officers or members. NO WARRANTY IS MADE, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY OPINION OR INFORMATION GIVEN OR MADE IN THIS PUBLICATION.

© 1990 - 2014 National Association of Insurance Commissioners. All rights reserved.

 

 

 


Questions and comments are always welcome. Please contact the Capital Markets Bureau at CapitalMarkets@naic.org.

The views expressed in this publication do not necessarily represent the views of NAIC, its officers or members. NO WARRANTY IS MADE, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY OPINION OR INFORMATION GIVEN OR MADE IN THIS PUBLICATION.

© 1990 – 2016 National Association of Insurance Commissioners. All rights reserved.