QBE Insurance Group Ltd (ASX: QBE) shares are in the spotlight in this dawning era of rising interest rates.
Yesterday (overnight Aussie time) the US Federal Reserve raised its official rate by 0.25%. That brings the Fed’s new target rate to a range of 0.25% to 0.50%.
While the move was widely expected, it’s worth noting that this marks the first rate increase by the world’s most watched central bank since 2018.
It’s also worth noting that the Fed flagged the likelihood of a number of additional rate increases ahead in 2022.
While the Reserve Bank of Australia has yet to follow suit, leading economists expect the RBA will begin tightening its own policies over the coming months.
Which brings us back to QBE shares.
Why interest rates matter
According to Firetrail portfolio manager Scott Olsson, speaking at a Firetrail webinar, QBE shares stand to be big beneficiaries of the looming interest rate hikes.
“It is a stock that’s been very hard to own over the past 15 years,” Olsson admitted.
Indeed, if you’d bought QBE shares 15 years ago, you’d be nursing a 66% loss today.
However, with interest rates likely to move significantly higher over the mid-term, he added, “Now is the time to own QBE.”
Here’s how the maths work out.
QBE holds some $3 billion of premiums, before claims payouts.
So, if interest rates go up just 1%, the insurance giant would book an extra $300 million in profits.
Another tailwind for QBE shares moving forward, Olsson pointed out, is the 30% lift in business insurance premiums over the past 3 years.
“That can flow through into better profitability rolling forward,” he said.
According to Olsson, QBE is currently trading at a 15% discount to its long-term trend.
“And that just screams very cheap to us, given earnings can grow by 20% into FY23 and 20% again into FY24,” he said.
How have QBE shares been tracking?
Over the past 12 months the QBE share price is up 12.1%, outpacing the 5.6% gains posted by the S&P/ASX 200 Index (ASX: XJO) during that same period.