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NAIC Capital Markets Bureau
Last Updated 5/4/17
Issue: Insurance companies invest in non-U.S. government debt motivated by its relatively high credit quality, liquidity, maturity distribution and acceptability to serve as collateral when required. Insurers' investments in non-U.S. sovereign debt are overwhelmingly from highly-rated countries such as Canada and Japan. However, it is important to note that insurers also have a relatively small exposure to long-term foreign sovereign debt whose credit quality is below investment grade.
Overview: Most countries do not have a private securities market that is as developed as in the United States. In many countries, the local sovereign government dominates the local capital market. There are often limited amounts and types of other fixed-income alternatives available for investment. For example, government bonds constitute more than 90% of the local currency bond market in Japan, with private sector bonds constituting less than 10% of its domestic bond market. Consequently, insurers in markets such as Japan have little alternative to investing primarily in local government securities
The U.S. insurance industry's exposure to foreign government securities as of 2015 year-end was about $95.8 billion or 2.5% of the total industry bond portfolio, down from $103.3 billion in the previous year. Life insurers held $77.3 billion or approximately 80.7% of the total industry sovereign debt holdings. Property and casualty insurers held $16.7 billion or about 17.4% of the industry total exposure. The insurance industry's foreign government investments are dominated by Japan and Canada whose long-term sovereign debt is highly rated by Standard & Poor's and Moody's Investors Service.
The U.S. insurance industry has decreased its exposure to the sovereign debt of countries with lower credit ratings through asset sales and maturities since the financial crisis. Sovereign debt issued by the governments of developed economies — such as the United States, Germany, United Kingdom, Japan, Switzerland and Canada — is considered essentially low-risk investment. The long-term sovereign debt of these countries has been assigned high credit ratings by Moody's and S&P. During and after the financial crisis, market yields on many of these government securities declined to low levels not seen in decades. This happened even though, in some cases, a country's credit profile deteriorated and its sovereign debt lost its highest credit rating. High levels of central bank activity to keep interest rates low and stimulate economies — combined with investors' increasing desire for safe, secure and liquid investments (such as government debt) — drove yields to historically low levels on the most creditworthy sovereign debt.
In contrast, the Eurozone financial crisis resulted in significantly reduced creditworthiness for lower tier sovereign credits, including Greece, Portugal and Ireland. Market yields on their sovereign debt rose as investors became increasingly concerned with their ability to make timely debt service payments, and, in turn, market prices declined as is expected given the inverse price/yield relationship that exists with fixed rate debt. In recent years, the Eurozone crisis has spread to Spain and Italy, two of the largest economies among European Union (EU) member states. U.S. insurance companies are required to hold capital to support their foreign sovereign debt holdings, just as they are with other forms of debt. The amount of capital varies based on the credit quality of the sovereign debt. This capital requirement is, therefore, likely to continue to have a positive impact on insurers' investment decisions in terms of credit risk.
Status: Insurance companies that own securities issued by a foreign sovereign government, an agency or political subdivision of a foreign sovereign government or a supranational entity (entities with more than one sovereign government as a member), or that are guaranteed directly or indirectly by such an entity, must file such securities with NAIC’s SVO in the Capital Markets & Investment Analysis Office unless they are filing exempt.