Why Brexit Shouldn’t Worry Hartford

The United Kingdom’s Brexit vote has major implications for the insurance and financial sectors, considering their investment yields and income are likely to fall due to the pressure on interest rates. Hartford‘s (NYSE:HIG) stock fell about 9% following the Brexit vote on June 23, amid increased economic uncertainty and fears of falling investment income owing to subdued interest rates and falling yields. However, it has since recovered on expectations of additional stimulus measures by central banks around the world to tide over the Brexit-related decline in trade and money supply.

Hartford has limited business and investment exposure in Europe. However, its investments in U.S. treasury bonds could result in lower returns going forward with its falling yield. After the vote, the yield on the 10-year U.S. treasury note fell below 1.5% for the first time since 2012, yields on U.K. benchmark government bonds fell below 1% for the first time on record and 10-year government bond yields in Germany ended below 0%. Other developed economies such as France, Sweden, Switzerland and Japan all touched all-time lows.

Impact Of Lower Interest Rates

Hartford is expected to generate about 9% of its revenues from investments in the global markets in 2016, totaling about $1.5 billion. The risk of persistent lower interest rates is unlikely to significantly impact this metric, considering that government securities are only about 10% of the company’s fixed maturity investments, which contribute about 80% to the net investment income. Therefore, government securities are expected to generate less than 1% of Hartford’s total 2016 revenues (80% x 10% x 9%= 0.72%) even if we assume that the yield on those securities is equal to its other investments in corporate bonds and limited partnerships.Hartford’s exposure to the U.S. and European government securities is 8% and 0.6% of its total fixed maturity investments, respectively, as shown below.
Please refer to our complete analysis for Hartford.

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