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Is QBE Insurance an opportunity?

Global insurer QBE Insurance (ASX: QBE) continues to bleed today, after announcing massive write-downs yesterday. Shares in QBE have fallen 8.4% in mid-afternoon trading, trading below $11, after falling 22% yesterday from above $15.00, wiping $5 billion off its market cap.

The company expects to report a US$250 million loss this financial year, after taking US$600 million in write-downs across various US businesses. QBE will take an additional US$300 million in claims provisions in its North American portfolio and expects to see higher claims as a result of a collapse in US corn prices.

QBE’s specialist lender-places business Financial Partner Services (FPS) is being restructured, resulting in a one-off charge of US$150 million and a writedown of the remaining US$330 million of its intangibles.The division is expected to report a loss in 2013, after gross written premium feel to US$960 million from US$1.6 billion in 2012, and likely to fall further in 2014 to around US$800 million.

Of course, these one-off writedowns are mostly non-cash items and the company still expects to make an underlying cash profit of US$850 million in 2013, down from $1,042 million in 2012.

QBE says its combined operating ratio (COR) is expected to be around 97-98%, and forecasts an insurance profit margin of around 6% on net earned premium of US$15.2 billion. COR basically represents the amount an insurance company has to pay out on claims versus what it brings in in premiums. QBE has consistently kept its COR below 100%, but many other insurers including Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) and Insurance Australia Group (ASX: IAG) frequently operate with CORs over 100%, driving profits through investment returns.

Several investment bank analysts have downgraded the stock over the past couple of days, with many previously predicting a good year ahead for QBE, particularly after a benign year for catastrophe claims such as cyclones, floods and hurricanes.

The obvious concern is that a number of issues have come out of the woodwork in recent times, not unlike the situation Leighton Holdings (ASX: LEI) finds itself in post the departure of Wal King. Those well may be a timing coincidence, but it could also be a poor reflection on previous management.

Foolish takeaway

The bull case suggests that new CEO, John Neal, has cleared the decks, taken the tough medicine, and the company can now get back to business, with a bright future as the US economy recovers. There’s also the possibility that Mr Market has overreacted, and at the current price, shares are cheap.

On the flip side, investors are wondering if there are any more skeletons in the closet, whether QBE will face having its credit rating cut, and consequently face having to do a capital raising.

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Motley Fool writer/analyst Mike King owns shares in Leighton Holdings. You can follow Mike on Twitter @TMFKinga

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