Why Brexit Shouldn’t Worry The Travelers Companies

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. Travelers‘ (NYSE:TRV) stock was one of the better performers post-Brexit in the financial sector, as it fell just over 1% following the vote on June 23. For comparison, Hartford‘s (NYSE:HIG) and AIG‘s (NYSE:AIG) stocks fell 9% and 7%, respectively, following the Brexit vote amid increased economic uncertainty and fears of falling investment income owing to subdued interest rates and falling yields. However, Travelers’ stock has since recovered owing to its limited exposure to Europe, as well as expectations of additional stimulus measures by central banks around the world to tide over the Brexit-related decline in trade and money supply. Its stock is up about 7% in the last two weeks.

Travelers 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 and Japan ended below 0%.

Impact Of Lower Interest Rates

Travelers is expected to generate about 9% of its revenues from investments in the global markets in 2016, totaling about $2.4 billion. The risk of persistent lower interest rates is unlikely to significantly impact this metric, considering that government securities are only about 7% of the company’s fixed maturity investments, which contribute about 86% to the net investment income. Therefore, government securities are expected to generate less than 1% of Travelers’ total 2016 revenues (86% x 7% x 9%= 0.54%) even if we assume that the yield on those securities is equal to its other investments in corporate bonds and limited partnerships.
Per our estimates, the company’s Investment of Insurance Premiums contributes less than 1% to Travelers’ overall value, so a slight decline in investment income is unlikely to have a major impact going forward.

Please refer to our complete analysis for Travelers.

Global Large Cap | U.S. Mid & Small Cap | European Large & Mid Cap |More Trefis Research