QBE Insurance Group Limited drops 7% in a week, is this a buying opportunity?

In the five trading days between April 7 and April 17, the share price of QBE Insurance Group Limited (ASX: QBE) fell over 7% from a high of $12.81 to a low of $11.91. The fall came during a period where the ASX 200 fell by only 1% and peers Insurance Australia Group Limited (ASX: IAG) and Suncorp Banking Group (ASX: SUN) fell between 0.3% and 2.3%. Therefore there must be something more to it!

QBE in 2014

QBE is a company in transition after a horror 2013 financial year. The company reported a loss of US$250 million as a result of poor operational performance and write-downs in the group’s troubled US operations. In a positive note for investors, QBE reported positive cashflow of over $750 million, indicating that it remains extremely profitable, regardless of paper-based writedowns.

The latest share price fall appears to me to be as a result of the potential damage caused by Cyclone Ita in North Queensland, and a report and announcement on 14 April about the potential sale of part of QBE’s US business.

After the rumours were released by numerous news agencies, QBE released a statement acknowledging that it was reviewing its US operations, including the potential sale of assets. The asset in question is the US ‘middle market business’ called Winterthur. Winterthur underwrites property and casualty insurance via agencies, and last year contributed around US$900 million of the group’s US$16 billion annual gross written premiums.

Does this matter?

I don’t believe so. Investors were already aware that QBE was reviewing its US business, and investors should reasonably assume that the review could include the sale of some parts of the business. This mirrors efforts by Australia’s two big miners BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO) which are looking to divest parts of the business delivering returns below expectations.

Foolish takeaway

Cyclone Ita could well end up being a drag on QBE’s earnings this year if there is widespread damage to properties and businesses, however investors in insurers should acknowledge these risks and trust that management have the appropriate reinsurance in place. Meanwhile, the turnaround of QBE’s US business is vital for its long-term success. I believe the new management team will make the correct decisions to bring return on equity and capital to more appropriate levels in order to boost the share price in coming years.

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Motley Fool contributor Andrew Mudie owns shares in QBE. You can find Andrew on Twitter @andrewmudie

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