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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.
What do insurance companies do? 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 ( PGR -1.30% ) , which tend to focus on buying bonds.
On the aggressive side, there are companies like Berkshire Hathaway ( BRKA -0.04% ) ( BRKB +0.11% ) , which, under former CEO Warren Buffett and his successor Greg Abel, famously uses much of its float to buy stocks and even whole companies. Image source: Getty Images. The key when it comes to bond yields and interest rates is that the cash isn't stuffed in a mattress.
It is put to work . And that means changes in market conditions will affect insurance companies. Sometimes in material ways.
For a company like Progressive, which has invested about 95% of its roughly $97 billion investment portfolio in bonds, rising yields can be a bit of a problem. Bond prices move in the opposite direction to yields. That happens so that existing bonds offer a yield commensurate with the current yield investors demand in the market.
So, the book value of a bond-heavy insurer can decline as the value of its bond portfolio falls. But rising bond yields aren't all negative. New premiums Progressive collects can be invested in higher-yielding bonds, increasing the income the company generates from its portfolio.
So rising yields are both good and bad. Premium Feature Moneyball Superscore 85 /100 Today's Change ( -1.30 %) $ -2.81 Current Price $ 213.48 But there's another complication: When the Fed increases interest rates, as it just did, it usually has economic implications. In the current instance, inflation is running hot, and the Fed is attempting to cool things off.
If inflation is pushing up an insurance company's costs, it could be facing profitability headwinds. Notably, Progressive's combined ratio, a measure of profitability for insurance companies, worsened by 1.1 percentage points year over year in the second quarter of 2026. In the month of June, the change was 3.4 percentage points in the wrong direction.
The company is still highly profitable, but market conditions appear to be changing. What about the stocks Berkshire Hathaway owns? With only about 5% of its portfolio in equities, Progressive is more exposed to bond prices.
However, as noted, other insurers have significant equity exposure. Rising interest rates and bond yields can be a headwind for companies like Berkshire Hathaway, as investors may shift assets from equities to bonds to collect higher yields from investments perceived as safer than stocks. That can lead to weak stock prices.
Another example of a stock-heavy insurance company is Cincinnati Financial ( CINF -0.53% ) , which has around 40% of its portfolio invested in equities. Today's Change ( 0.11 %) $ 0.57 Current Price $ 509.77 Meanwhile, there is always the risk that the Fed's efforts to battle inflation lead to an economic slowdown. Bear markets often accompany recessions, which can lead to a swift decline in the value of an equity-heavy insurance portfolio, again reducing the insurance company's book value.
Of course, stock sell-offs often cause stocks to fall, including insurance companies' stocks. Berkshire Hathaway faces an added complication from rising costs, since it also owns entire companies. There are a lot of moving parts to consider with this complicated insurance company, including the fact that it held roughly $365 billion in cash at the end of the second quarter, which should act as a ballast during a turbulent market.
And that cash would allow Berkshire Hathaway to buy stocks during a deep market decline, should one occur. The real answer: Be prepared for volatility There's no single answer to what happens to insurance companies when bond yields rise. It is, as most things on Wall Street, complicated.
Some insurance companies will be more exposed to fluctuating bond yields than others, while others will be more affected by stock price volatility. The share prices of all insurance companies, meanwhile, will be impacted by bull and bear markets. And insurance companies of all types have to deal with rising costs, just like every other company in the world.
With today's changing market dynamics, the one thing you should most expect is increased uncertainty.
Source: The Motley Fool
