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QBE – From bad to worse and back to bad

It’s been a wild and rocky two weeks for shareholders in QBE Insurance (ASX: QBE). What began with a trading halt on 6 December was followed on 9 December by an announcement relating to its North American division’s claim provisions and a subsequent writedown of goodwill. The response by investors saw the stock plunge initially around 19% to $12.50 having traded previously at $15.45.

By the end of the first week (13 December) the stock had continued to trend downwards to $10.50 – a fall of over 30% from the pre-announcement trading price.

While that was bad, things got even worse this week as QBE’s share price continued to fall, reaching a low of $10.05 on 18 December. It appears that at the $10 mark the insurer finally found some support, no doubt helped by analysts at Commonwealth Bank (ASX: CBA), which came out and upgraded the stock to “overweight” from “neutral”. Since Wednesday the share price has bounced back over 10% to be trading near $11.30 at midday Friday.

Shareholders will be hopeful that the worst of the selling is now finally over and that the beaten down stock price will continue to be supported. However the uncertainty surrounding the outlook for earnings as well as the insurers provisioning will likely be a cloud hanging over the firm for quite some time to come.

In significant contrast to the knocked down valuation being applied to QBE, in other insurance related news this week, the market rumour that Wesfarmers (ASX: WES) was preparing to offload its Insurance division turned out to be true with the announcement that the conglomerate had agreed to sell the business to Insurance Australia Group (ASX: IAG) for $1.845 billion.

Foolish takeaway

Insurance is both a cyclical business and also a complex business to understand. While investors such as Warren Buffett have proved that enormous wealth can be generated from owning insurers, many other successful investors have often shied away from the sector.

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Motley Fool contributor Tim McArthur owns shares in QBE Insurance.

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