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Why you should bet on QBE Insurance

The Australian dollar has seen a sharp drop against the US dollar in the last four weeks, from buying more than one US dollar, down to US$0.95 last week. And although retailers importing goods from outside Australia like Myer (ASX: MYR) and Harvey Norman (ASX: HVN) won’t be happy about the news, investors in international insurance group QBE Insurance (ASX: QBE) won’t be complaining.

By the global nature of QBE’s business, the company earns almost 75% of its gross written premiums outside of New Zealand and Australia. A falling Australian dollar means that when those revenues are repatriated to Australia the company has the ability to profit from a favourable change in exchange rates.

In 2012 the negative impact of exchange rate changes wiped US$132 million off QBE’s gross written premium revenues, suffering from an average A$/US$ rate of $1.04. However QBE has the ability to use its discretion to lock in future profits at times when foreign exchange rates are favourable relative to its budgeted rates. In 2011 QBE was able to generate foreign exchange gains for US$188 million and in 2010 the figure was US$141 million, according to the company’s 2011 annual report.

QBE

Source: Yahoo Finance

Revenues from gross written premiums have increased by 35% since 2010 and even small changes in exchange rates can result in big profit gains for QBE.

It is also likely that the budgeted exchange rates for the 2013 financial year are similar to 2012 given the sustained period that the Australian dollar has been high against the US dollar. Last week the Aussie dollar hit a 33-month low against the USD, apparently in response to news from the US Labor Department that said 175,000 jobs were generated in May. This would represent a sign the US economy is recovering giving cause for the US dollar to strengthen against its trading partners.

Foolish takeaway

Currency exchange rates can be fickle things, jumping up or down at the slightest sign of trouble or recovery. It is a factor that all businesses with a significant global exposure face, from banks like NAB (ASX: NAB) to mining companies like BHP Billiton (ASX: BHP). QBE suffered last year from the high Australian dollar, but a sustained reversal in 2013 could have a highly positive impact on profits.

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Motley Fool contributor Regan Pearson owns shares in QBE Insurance.

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