What History Says About Insurance Stocks When Bond Yields Rise
Rising bond yields can both help and hurt insurance stocks, so the latest Fed rate hike is an important development.
Overview
Bond yields had been rising before Kevin Warsh's Fed went into its most recent meeting. That indicated Wall Street expected a hike, despite Warsh materially reducing guidance to investors. When the Federal Reserve meeting ended, Warsh announced a quarter-point increase. If you own an insurance company, this is good news. But it is also bad news. Here's what you need to know.
Insurance companies collect premiums up front. They hold that cash, known as the float, until their customers make claims. While an insurance company has the float, it can invest it. Different insurance companies handle the cash differently. On the conservative side, there are companies like Progressive (NYSE: PGR), which tend to focus on buying bonds. On the aggressive side, there are companies like Berkshire Hathaway (NYSE: BRKA)(NYSE: BRKB), which, under former CEO Warren Buffett and his successor Greg Abel, famously uses much of its float to buy stocks and even whole companies.
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Originally published at www.fool.com.