Below, we look at the degree to which investment income (a function of bond yields, and the idea of positive returns to float) can drive the insurance sector NPAT.
Here’s MPL, note the near halving in investment income, as yields collapsed post the pandemic.
In other notes we’ve explored mathematically more rigorous methods, to convey that the sector has material leverage to rising rates (rolling regression analysis of stock returns against the shape and slope of the yield curve).
But simply looking at the degree of investment income, by stock, over time does a perfectly reasonable job too. For QBE, higher investment income means material upgrades to earnings, should higher rates prove even modestly enduring.
Note that Suncorp has a bank attached, although of course bank sector NIM’s are positively correlated to higher rates too.
Whilst we are underweight the banks, we’ve a) narrowed the gap, and b) have plenty of insurance exposure in the portfolio. As such, we are well positioned should higher rates stick around.
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