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The stock picker’s guide to QBE Insurance Group Ltd in 2014

QBE Insurance Group Ltd (ASX: QBE) has been the troubled teen of the insurance industry for the last two years. Some of this has been plain bad luck with insurance risks, but a number of problems have also been the result of worrisome internal operations.

For 2014 QBE has promised change, so here are some key points for long-term investors to be aware of for the year ahead.

Expect a net loss

In December QBE sent shockwaves through the market when it advised it expects to report a net loss of around $250 million for the year, as a result of substantial ‘intangibles’ and goodwill write-downs from the company’s North American operations. In spite of this QBE expects cash NPAT (excluding write-downs) of around $850 million, down from $1.042 billion in 2012.

Focus on North America operations

In 2012 insurance profit from the company’s North American division plummeted from US$440 million to a loss of US$170 million, largely as a result of super-storm Sandy and severe drought conditions in the U.S. This was expected to substantially improve in 2013, but after announcing big write-downs just how much the division has improved will be a key area for investors to watch.

Of particular concern is QBE’s exposure to lender-placed insurance, which has seen gross written premiums plunge 40% and will report a loss for 2013.

After making “substantial changes” to the U.S. management team earlier this year, QBE says it expects North American operations to break even in 2014 and “generate more acceptable returns thereafter”.

A shining light

QBE has already slashed its dividend and the more than 30% fall in the company’s share price after the December announcement suggests investors are yet to be reassured the problems are over, preferring the surging profit of insurers like Insurance Australia Group Limited (ASX: IAG).

However, if this is the end of QBE’s U.S. troubles the current beaten-down share price could represent good value for a company with such scale and earning potential.

Foolish takeaway

For 2014 to be a fresh start for QBE, the company’s management needs to definitively step up and prove to weary investors they can turn the situation around to drive a new beginning for the insurance giant.

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The Motley Fool contributor Regan Pearson owns shares in QBE.

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