QBE's share price has fallen 11% today after management forecast...

QBE's share price has fallen 11% today after management forecast an 18% fall in net profit to US$390m for the six months to 30 June. The company’s combined ratio is now expected to be in the 96-97% range, compared to previous expectations of around 93%, while profit margins are likely to be 7-8%, compared to earlier guidance of around 10%.
The main culprit was a US$170m increase in claim reserves for QBE’s Latin America business, the majority of which was due to a review of Argentina’s workers’ compensation portfolio. The review was provoked by an ‘increase in litigated workers’ compensation claims costs following legislative changes in 2012 and 2013, and partly in response to recently deteriorating economic conditions in Argentina’. This is despite a US$200m increase in claims reserves in 2012, and a further US$140m in 2013.
Most disappointing is that the Argentinian actuarial changes weren’t picked up in the global review outlined in the last full-year result. Management seems to have lost control of its insurance book, and it’s extremely disappointing we’re only hearing about the issues a month after the end of the half.
Key Points

• Profit hit by workers' compensation losses in Latin America
• Reduced upside means stock no longer looks cheap

Gross written premium is expected to be about US$8.5bn, compared to the company’s intended US$8.9bn and 10% below the US$9.4bn written last year, but we’re happy to see management let go of business when pricing is unfavourable. The flip side is that while more disciplined underwriting increases margins, revenue and profits are likely to decline and so too does our valuation.
As profits decline, the risk that the company will need to raise capital at some point increases. If interest rates were to rise, this might take some of the pressure off, but we aren't macro forecasters and need to value QBE in the here and now.
QBE’s share price is down 12% since QBE: shrinking upside on 15 Apr 14 (Hold – $12.00) but, after giving this company a host of chances to turn itself around, after five years we’ve finally lost our patience. The upside is now much less than our original estimate and this result only adds to that concern.
QBE no longer looks particularly cheap, especially given the added risk of its mortgage business should house prices decline or if there was another string of natural disasters. We’ll provide a detailed review, and lessons learned, when the company posts its interim result on 19 August