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Why QBE is up 24% in one month

It’s been a rocky few years for investors in QBE Insurance (ASX: QBE). After the company’s share price peaked at nearly $35 in August 2007, the global financial crisis, low interest rates, natural disasters, ill-timed acquisitions, and concerns over the capital base and a discounted capital raising all added to the pressure, which saw the share price go as low as $10.02 towards the end of 2012.

It looks as though things may finally be looking up for the insurer and its shareholders now, with the stock reaching a new 52-week high this week at $16.23, up 24% for the month and 30% over 12 months.

Three catalysts working in QBE’s favour

Firstly, with nearly 25% of the company’s business being written in North America, the declining Australian dollar is a significant tailwind for QBE.

Secondly, all of the losses incurred over the past few years from the string of natural disasters have created an environment for insurers to raise the insurance premiums charged to customers. Hence the outlook for revenue growth at QBE is improving.

Thirdly, the ratings agency Standard & Poor’s (S&P) has confirmed QBE’s financial strength rating of “A+” and raised the outlook from “negative” to “stable”. This is important to investors, as QBE’s CEO John Neal said at the time of the S&P upgrade, “we recognise the importance of this rating in demonstrating the company’s financial strength to our partners and customers.”

Of these three catalysts, the currency catalyst is likely the major driving factor pushing the share price higher recently; however, the two business-related catalysts are equally important in driving the fundamental valuation support.

Other companies with significant USA-based businesses that stand to benefit from a declining Australian dollar include CSL  (ASX: CSL), James Hardie Industries (ASX: JHX) and Brambles (ASX:  BXB) and all are worthy of investors watch lists.

Foolish takeaway

One remaining outstanding issue for QBE is the ultra-low interest rates it is receiving on its large cash balance, a significant percentage of which is held in the USA. No one knows for sure when the US Federal Reserve will “turn off the taps” of money and allow interest rates to rise, but when they do this will certainly be a further catalyst for QBE Insurance.

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More reading

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.  This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Motley Fool contributor Tim McArthur owns shares in QBE Insurance.

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