Banks aren’t the only British companies that investors sold hand over fist after the U.K. voted to leave the EU last week.
Despite the broader market rallying back during the latter part of this week, some sectors are still being feeling the pain.
While none of these insurers is facing the same imminent catastrophe that American International Group Inc (AIG) was facing back in 2008, a closer look at the stocks reveals why the market is so concerned.
Read on to learn more about how these three companies are faring.
Insurance Stocks to Watch: Aviva Plc (ADR) (AV)
About half of AV’s business comes from the EU, and company management has been very outspoken when it comes to the risks the company now faces. Prior to the vote, AV CEO Mark Wilson called the market uncertainty surrounding Brexit “kryptonite to business.”
At a shareholder meeting in May, chairman Sir Adrian Montague bluntly said, “There’s no turning back if we get into the Brexit situation, and for us there’s no insurance policy against Brexit.”
Kryptonite may be the best analogy when it comes to the stock’s share price, which came crashing down and is currently sitting at a loss of 21% since the Brexit vote.
To reassure investors, the company released a statement highlighting its robust Solvency II coverage ratio of 180% and surplus of £9.7 billion.
A company’s solvency ratio is a measure of whether or not its cash flow is sufficient to meet its liabilities.
Investors around the world hope that AV’s balance sheet is as strong as it claims. AV and PUK were the only two out of nine U.K. insurers that the International Association of Insurance Supervisors deemed “global systemically important insurers.”
Insurance Stocks to Watch: Prudential Public Limited Company (PUK)
Speaking of PUK, the stock took a 19.4% hit right after the Brexit vote and remains down over 16%.
Despite market fears, PUK’s Solvency II coverage ratio is even better that AV’s at 190%. In addition, the company reportedly generates 87% of its business from outside the EU. Roughly three-fourths of that business comes from the U.S. and Asia.
Not only should those business segments not be directly impacted by the Brexit, but earnings in the U.S. dollar, the Japanese yen and other foreign currencies could boost PUK’s earnings power.
The pound has collapsed more than 10% since the vote and has hit its lowest level in more than 30 years. Both the dollar and the yen have surged as investors flock to more stable currencies.
Perhaps PUK’s strong balance sheet and large earnings exposure to the U.S and Asia are why the stock spiked more than 11% during a strong Tuesday trading session after the market’s initial knee-jerk sell-off.
Insurance Stocks to Watch: Metlife Inc (MET)
Although MET’s 7.5% post-Brexit decline to this point is more muted than the two British insurers mentioned above, MET’s decline is much steeper than the average U.S. financial stock.
MET has limited direct exposure to the U.K. market, but investors are still dumping U.S. insurers for an entirely different reason. Insurers rely heavily on returns from their massive investment portfolios, which are mostly devoted to bonds.
Before the Brexit vote, the futures market had predicted roughly a 50% chance of a second Federal Reserve interest rate hike by the end of 2016. As of Tuesday, that chance was down to 15%.
Interest rates are already at historically low levels. The likelihood of a prolonged low-rate environment in the U.S. and the possibility of negative interest rates in many European economies creates a bleak outlook for the bond portfolios of all insurers.
As of this writing, Wayne Duggan had no positions in any of the stocks mentioned.