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Is now the right time to buy QBE Insurance Group Ltd?

What: While there are many macro events which are weighing on investors’ minds at present, without a doubt the potential for an imminent rise in US interest rates at the next meeting of the US Federal Reserve is amongst investors’ greatest fears.

While it is certainly true that global markets could be shaken by the raising of US rates as investors are forced to reassess their valuation of risk assets, there are also individual companies which can be identified that are likely to benefit.

Who: One such company is QBE Insurance Group Ltd (ASX: QBE). QBE is Australia’s largest insurance company with operations spanning the globe. Like most insurance companies, QBE enjoys two primary sources of revenue – insurance premiums received and investment income earned on those premiums.

Due to the nature of QBE’s liabilities, the group invests the large majority of its premiums (also known as float) in cash and fixed interest with only a very small exposure to equities. These allocation decisions have acted as a drag on QBE’s performance over the past few years as the company has had to make do with the very low interest rates and yields available.

What’s next: According to forecast data provided by Morningstar, QBE is set to experience a jump in earnings per share (EPS) from 68 cents per share (cps) in 2014 to 89 cps in 2015 (the group operates on a calendar year basis). In 2016 EPS of 107 cps are predicted; while in 2017 EPS of 119 cps are forecast.

While the share price has already gained 17.5% in the past 12 months in recognition of the improving outlook for the group both from a more focused business model, cost saving initiatives and expectations of an improving interest rate outlook, at just 12x 2016 forecast earnings the stock could still have further near term upside.

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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