QBE Expects Surge in Argentine Claims Amid Profit Warning

QBE insurance As the South American country works to avoid a second debt default in 13 years, one of Australia's biggest insurers, QBE Insurance Group Ltd., was dealing with a problem of a different kind: a surge in compensation claims by Argentine workers that helped to wipe more than a billion dollars off its value on Tuesday.

Source: Source: WSJ - Robb Stewart | Published on July 29, 2014

Shares in QBE fell as much as 14% after it issued a warning about its first-half profits, largely because management set aside an additional 170 million Australian dollars (US$160 million) to fund work-related claims in Argentina ranging from stress to hearing loss.

"This is not something we expected this year," John Neal, QBE's chief executive officer, told The Wall Street Journal. "But this is a very specific single item that we felt that we had to call out."

In a regulatory filing, QBE said its earnings likely fell to about A$390 million in the six months through June from A$477 million a year earlier. It forecast that its first-half insurance profit margin would come in at 7%-8%; the consensus forecast among analysts was for a result of about 10%. The company, which has a market value of A$13.5 billion, is due to report its half-year earnings in detail on Aug. 19.

Compounding the problems in Argentina were higher claims elsewhere. QBE said floods in Britain, winter storms and tornadoes in North America and storms in Europe would lead to payouts to customers that offset smaller-than-expected claims tied to natural catastrophes in Australia.

In Argentina, the spike in claims followed legislative changes made in 2012 and 2013 that opened the courts to a wider range of compensation cases. Workers since then have been allowed to claim for a range of occupational illnesses, while previously, courts only heard cases involving permanent disability.

The legislative changes have led to a sharp rise in litigation. According to Mr. Neal, one in three compensation claims in Argentina are now handled by the courts, more than six times the level seen in North America. While QBE expects the emergence of more court cases covering a wider range of claims will eventually lead to a fall in the average cost of claims, this hasn't happened in Argentina so far.

The increase in claims has coincided with a deterioration in Argentina's economy. Over the past year, the Argentine peso has weakened more than 30% against the U.S. dollar. Some economists estimate annual inflation is running close to 40%.

Mr. Neal said QBE Seguros La Buenos Aires, the insurer's Argentinian business, is profitable and is expected to remain so, and the company was aiming to "weather proof" its reserves for claims that in any case might not be paid out for a decade or more. Also, he said double-digit interest rates in the country were having a positive effect by increasing returns on investments.

"About 90% of our business [is] in very mature markets in North America, Europe, Australia, New Zealand and those businesses are doing exactly what we would expect them to in 2014," he said.

It isn't the first time the company has disappointed investors. Last December, QBE's share price fell 22% in one day after it said a jump in provisions for claims and a hefty write-down against its North American businesses would push it to a loss for 2013.

"We were shocked by today's downgrade announcement given management's confidence at the time of the last downgrade that they had [a] hand on the problems the company was facing," said Brett Le Mesurier, a director at stockbroker BBY Ltd. "We thought the next round of problems would take all year to come to the fore, but not so."

Analysts at Macquarie said the profit warning, which included news that QBE's first-half gross will be about A$8.5 billion, down from A$9.4 billion a year earlier, would further test shareholders' patience. QBE's shares have fallen around 35% over the past year, compared with an almost 11% rise in the broader S&P/ASX 200 index.