Third downgrade in two years for Aussie insurance giant

by Maryvonne Gray 30 Jul 2014

Third downgrade in two years for Aussie insurance giant

Shares in QBE Insurance Group fell as much as 14% yesterday after it issued a downgrade on first half profits, with analysts wondering if even that guidance can be relied upon.
 
The company has had to strengthen its claims reserve by $170m in Latin America after a law change in Argentina has triggered a surge in litigation by workers filing compensation claims with the courts at six times the level seen in North America.
 
QBE’s CEO John Neal told The Wall Street Journal: “This is not something we expected this year. But this is a very specific single item that we felt we had to call out.”
 
According to its market update filed yesterday, QBE said its earnings fell to about A$390m in the June half from A$477m a year earlier. The Group’s first half insurance profit margin is now likely to be 7-8% compared with consensus expectations of around 10%.
 
The problems in Argentina were compounded by higher claims elsewhere.
 
Floods in Britain, winter storms and tornadoes in North America and storms in Europe would all offset the lower than expected level of claims relating to natural catastrophes in Australia.
 
Neal said the mature markets in North America, Europe, Australia and New Zealand, which comprised 90% of the business, were doing ‘exactly what we would expect them to in 2014.’
 
Gross written premium (GWP) was expected to be around A$8.5 billion and below the company’s budget of A$8.9 billion for the half.
 
“Approximately one third of the reduction in GWP and the majority of the reduction in net earned premium relative to the prior period was due to the impact of foreign exchange,” said the report.
 
An operational transformation program which is nearing completion in Australia, fully underway in North America and recently launched in Europe had meant the Group’s expense ratio was marginally ahead of budget for the half.
 
In December, QBE’s share price fell 22% in one day after it said a jump in provision for claims and a write-down against its North American businesses would push it to a loss for 2013.
 
Analysts had expressed shock at this latest downgrade saying it would further test shareholders’ patience.