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QBE continues to bleed from US operations

QBE Insurance’s (ASX: QBE) terrible run in the US continued last week with the company agreeing to pay a US$10 million settlement to the US Department of Financial Services (DFS) for the way it was operating its ‘force-placed’ or ‘lender-placed’ insurance. The insurance protects lenders and mortgage investors if home owners stop paying their premium.

US borrowers are often forced to pay for the insurance, which is required under the loan contract. However QBE, through subsidiary Balboa Insurance, and another key provider of the insurance were found to have paid banks big commissions to win the business and then passed that cost on to the borrower.

The market for force-placed insurance is dominated by QBE and American insurance provider Assurant, Inc. (NYSE: AIZ), who agreed to stump up US$14 million for similar breaches last month. QBE will also have to offer compensation to affected home owners and change the way it operates the insurance. The DFS now prohibits insurance companies from paying commissions to banks for the policies and QBE has reduced its rates on forced-placed policies by up to 9% following a review.

Balboa was picked up in 2011 by QBE’s former CEO Frank O’Halloran during the company’s aggressive expansion program which netted over 140 new acquisitions. But the penalty is just the latest bleeding of capital in a disastrous period for QBE’s US operations. The company’s 2012 result was marred by losses in the US, with insurance profit plummeting US$610 million — from US$440 million to a loss of $170 million — on a margin of -4.9%. The outcome was the combined effect of massive losses from super storm Sandy and one of the worst US droughts on record.

Unlike fellow insurance companies IAG Limited (ASX: IAG) and Suncorp Group (ASX: SUN) QBE has a high exposure to the US, which represents 35% of the company’s gross written premiums.  Despite the losses in its 2012, new group CEO John Neal said in the annual report he was confident the region will “exceed our hurdle return expectations over time”.

Foolish takeaway

QBE is like the old Monty python sketch “Black Knight“, where despite having both arms chopped off and bleeding profusely, the knight proclaims “it’s only a flesh wound!”. The huge losses sustained by the company’s US operations may be isolated events from which it can battle on, but with problems persisting investors will be hoping the company can turn things around before it loses a limb for good.

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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 Regan Pearson does not own shares in any of the companies mentioned in this article.

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