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NAIC Capital Markets Bureau
Last Updated 3/1/18
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 2016 year-end was about $106.5 billion or 2.6% of the total industry bond portfolio, up from $95.8 billion in the previous year. Life insurers held $87.2billion or approximately 81.9% of the total industry sovereign debt holdings. Property and casualty insurers held $17.6 billion or about 16.6% of the industry’s 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. In the current interest rate environment, some foreign government bonds (certainly not all as German bonds and Japanese government bonds, for example, have had yields close to 0% for years) offer higher yields than U.S. government bonds.
The price of government debt is falling in leading markets including Germany as the recent sell-off in sovereign debt securities continues. The yield on Germany’s five-year government bonds turned positive for the first time since late 2015. Five-year German notes reached 0.013% at the end of January 2018. The shift carried through into longer-dated debt as well, with the 10-year German yield reaching 0.688%, its highest level since late 2015. These changes may be the latest evidence global bond markets are responding to economic growth, in a trend which could end the three-decade-long sovereign bull market.
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.