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Is QBE Insurance a buy?

Global insurer QBE Insurance (ASX: QBE) has had a rocky time the past decade. From a level around $10 in 2003 the share price soared to over $30 in 2007 before reversing and tumbling all the way back to $10 around this time last year.

The stock currently trades at $15.59, which has provided a 50% gain to investors who picked the bottom last year (or long-term shareholders who have owned the stock since early 2004) but losses of 50% for investors who were unlucky enough to pick the top in 2007.

With the business having undergone significant restructuring at the hands of CEO John Neal which should lead to significant cost saving flowing through over the next few years now could be a good time for investors to take a closer look at QBE Insurance.

One broker that recently took a look at QBE is Commonwealth Bank (ASX: CBA). According to the Australian Financial Review, after reviewing QBE’s outlook, Commonwealth Bank has upgraded the insurer’s rating from ‘neutral’ to ‘overweight’ stating that “the stock is attractive on its forecast for fiscal 2015 and significant earnings growth is very achievable in the next two years.”

Earnings growth will likely be driven by both the cost savings gained from the streamlining of QBE’s business and also from the expectation that over the next two years quantitative easing in the USA will end, which will drive up interest rates. QBE holds vast amounts of cash on its balance sheet for which it currently earns very little interest income. One of the benefits domestic peers Insurance Australia Group (ASX: IAG) and Suncorp (ASX: SUN) have been enjoying over recent years is their greater relative exposure to Australian interest rates which are higher than those available overseas.

Foolish takeaway

Based on Commonwealth Bank’s numbers, QBE is forecast to earn 83.5 cents per share (cps) for the financial year (FY) to December 2013, while for FY 2014 and FY 2015, Commonwealth Bank is forecasting 97.1 cps and 129 cps respectively. Based on its current share price this puts QBE on an undemanding FY 2015 price-to-earnings ratio of 12.1.

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Motley Fool contributor Tim McArthur owns shares in QBE Insurance.

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