Please ensure Javascript is enabled for purposes of website accessibility

How One Company Is Preparing for the Fed's About-Face

By Matt Koppenheffer - Apr 5, 2013 at 1:58PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

How one insurance company is preparing itself for a change in the interest-rate environment.

Zero-percent interest rates aren't going to last forever.

That's pretty obvious. What's less obvious is the best way to plan for the change. One of the industries that will be particularly challenged when the rate environment changes is the insurance industry.

Insurance companies keep large investment portfolios to both keep money available to pay out claims and earn investment returns for shareholders. While some insurance companies like Markel (MKL 2.77%) and Berkshire Hathaway (BRK.A 1.28%)(BRK.B 1.25%) -- which owns GEICO, among other insurers -- are famous for the investments they make in stocks, most insurance companies (Berkshire and Markel included) maintain hefty fixed-income portfolios.

This is a problem in a changing rate environment -- particularly one going from low to high -- because it means insurers are making FI investments with low yields today that will potentially go down in price as rates rise. And yes, besides the potential for losses as rates change, there's also the fact that buying FI instruments with low yield... well, sucks.

Today I had the chance to ask Tom Wilson, the CEO of Allstate (ALL 2.09%), what his company is doing in the face of rock-bottom interest rates. Wilson made it clear that he does think the rate environment will change, and he ticked off a number of things Allstate is doing to address this:

  1. Allstate is focusing more on owning things itself rather than lending money to the people that own things.
  2. It's being sure it's investing in debt that's likely to be paid back (he mentioned concerns he has with the finances of some municipalities).
  3. The company has shortened the duration of its portfolio.
  4. It's steering clear of European fixed income.

If you're an investor in Allstate, this provides some necessary perspective on what to expect from the company on the investing side. Specifically, a shorter-duration FI portfolio could lead to lower investment returns today, but may protect the company down the road.

But what if you're not an Allstate investor and don't maintain a largely fixed-income, near-$100 billion portfolio? There are still some interesting takeaways from Wilson's comments.

  1. Being an owner rather than a lender. To the extent that it can, Allstate is trying to own things (equity) rather than lend (bonds). Everyone's portfolio and investment needs are different, but this goes against the ostrich approach -- hiding out in bonds and shunning stocks -- that many investors have taken in the wake of the recession.
  2. Lend to those who will pay you back. Wilson was talking about this in terms of bonds and fixed income, but this can also remind us of some great equity-investing wisdom: The return of capital trumps the return on capital. Or, as Warren Buffett has put it "Rule No. 1 is don't lose money. Rule No. 2 is never forget rule No. 1."

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Allstate Corporation Stock Quote
The Allstate Corporation
$133.69 (2.09%) $2.74
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$468,805.04 (1.28%) $5,915.04
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
$312.50 (1.25%) $3.86
Markel Corporation Stock Quote
Markel Corporation
$1,377.07 (2.77%) $37.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.