Insurers of all stripes have risen since the election of Donald Trump on November 8. Insurance Australia Group Ltd (ASX: IAG) ("IAG"), QBE Insurance Group Ltd (ASX: QBE), and Suncorp Group Ltd (ASX: SUN) are all up more than 15% since that time – which makes sense, since the market has latched on firmly to Trump's idea of higher interest rates.
With multi-billion dollar portfolios of fixed-interest securities, the above companies are obvious winners from higher rates.
However, one company that rose strongly after the election, Medibank Private Ltd (ASX: MPL), probably doesn't deserve the interest it's been getting – investors might have been a bit carried away with the whole higher interest rates thing.
As of its most recent full-year report, Medibank had approximately $2 billion in investments. It's not all in fixed interest securities, but for simplicity's sake we will pretend that it is. Each 0.25% increase in interest rates would result in an extra $3.5 million in profit after tax, or approximately a 0.8% increase in profit, which was $417 million in 2016. Assuming interest rates jump by 3 full percentage points (3.0%) Medibank stands to gain around 9.6% in Net Profit After Tax, according to my ballpark calculations.
Contrast this with IAG, which has $13 billion in investments, and made Net Profit After Tax of $702 million in 2016. A 0.25% increase in interest rates would contribute an extra $23 million to IAG's profits after tax, or approximately 3%. A 3.0% increase in interest rates would thus boost IAG's profits by a whopping 36% after tax.
We can see why IAG shares have been in high demand recently – but Medibank, not so much. Either way, it looks as though the near-term impact of higher interest rates – bearing in mind that a 3.0% increase in interest rates is equivalent to 12 ordinary rate rises – is well and truly baked into Medibank's share price at this point.
