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QBE Insurance to report massive loss — what should you do?

After entering a trading halt last Friday pending an announcement relating to its North American operations, QBE Insurance (ASX: QBE) has on Monday morning informed the market that it will increase its North American claims provision and write down its North American goodwill, identifiable intangibles and other assets.

The sum of these write-downs is forecast to turn a cash net profit after tax (NPAT) of US$850 million into a reported net loss of US$250 million. The expansion into the USA under previous management would appear to be nothing short of a disaster, with the announcement stating that included in the loss would be a write-down of US$600 million to goodwill, primarily in North America. QBE’s poorly executed USA expansion will no doubt evoke memories for some long-term investors of the National Australia Bank’s (ASX: NAB) past troubles with the bank’s expansion into the USA and the losses incurred in the HomeSide business.

For shareholders who have been following the progress of QBE over the past few years, the write-down in goodwill will not be a shock given the poor performance of the USA division, however it is the weaker “cash NPAT” and related metrics that are concerning. The revised guidance is for a group-wide combined operating ratio (COR) of 97% to 98% and an insurance margin of just 6% on net earned premium, which have together contributed to a fall of nearly US$200 million in cash profits.

Importantly for investors — although how much faith to place in management’s guidance is questionable — the company expects the COR and insurance profit margin to improve to 93% and 10% respectively and for the North American division to trade profitably in the 2014 financial year.

Foolish takeaway

Compared with the domestically focussed Insurance Australia Group (ASX: IAG), QBE Insurance is many times more complicated. This makes analysis and valuing QBE very difficult but not impossible. As should always be the aim when investing for the long term, shareholders should approach QBE with a level head and consider its future potential and not get swept up by the crowd and herd-mentality.

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Motley Fool contributor Tim McArthur owns shares in QBE Insurance.

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