QBE Insurance Group Ltd. slumped the most in seven months after forecasting an 18 percent decline in first-half earnings due to higher claims in Latin America and competition with other insurers.
Net income will drop to around $390 million for the six months ended June 30 from $477 million a year earlier, the Sydney-based company said in a regulatory statement today. The insurer wrote about $8.5 billion of insurance premiums in the half, compared with a planned $8.9 billion, while it boosted its Latin America claims reserve by $170 million due in part to increased workers compensation claims in Argentina.
The weaker forecast increases the challenge for Chief Executive Officer John Neal, whose focus on profitability recommended him for the company’s top job when he was appointed in 2012. QBE shares declined 11 percent to A$10.57 at the close in Sydney, the biggest drop since December, and were down 35 percent over the past year.
“It’s disappointing following three downgrades last year and puts back the recovery in earnings and reputation another six months,” David Ellis, an analyst at Morningstar Inc. in Sydney, said by phone. “These one-off items caught me by surprise. I can’t say I’m confident” that QBE has resolved the problems in its Argentine business.
QBE, which earns about three quarters of its premiums outside Australia and New Zealand, posted a full-year loss of $254 million in 2013, its first in 12 years, as it wrote down its North American operations. The company is the worst- performing of the six companies in Australia’s S&P/ASX 200 insurance sub-index over the past 12 months.
The group expects a profit margin of 7 percent to 8 percent for the period, compared with consensus forecasts of around 10 percent, it said. On an underlying basis, QBE maintained its February forecast for an underlying profit margin of 10 percent in 2014, down from 10.6 percent in 2013.
About $100 million set aside for estimated losses at QBE Argentina Aseguradora de Riesgos del Trabajo, along with the company’s forecast full-year loss last year and the problems in North America, caused Moody’s Investors Service to downgrade QBE’s debt ratings one level to Baa2 on Dec. 10.
The latest $170 million charge on the Latin American businesses was greater than the company had expected and the company was confident it was “the right number”, Neal told an investor call after the announcement.
“Going into that review I would not have anticipated a number anywhere near as large as the number we are disclosing today,” he said. “It’s very important that we demonstrate that we’re decisive and act clearly.”
Hailstorms in Belgium, Germany and central Europe and floods in the U.K. had also contributed to the weak performance.
“There has been greater loss activity outside Australia than perhaps people would have anticipated,” he said. The 10- week duration of the U.K. flooding meant “the losses there are about $85 million higher than we anticipated,” he said.
CM Editor’s Note:
In its statement, QBE said that North American operations generated an underwriting profit, but that the result worsened in comparison to the prior period, highlighting the impact of a quota share.
“Significant activity is underway to right-size our expense base in our North American Operations as well as improve our loss making lender placed insurers. We are encouraged by the progress we are making in North America,” the statement said.