Zurich Insurance Group AG, the world's number-two insurer by market capitalization, has taken another hit from its operations in Germany, saying on Wednesday that its third-quarter profit would sustain a $550 million charge related to business there.
The charge, the latest in a series of write-downs in Germany, follows a review of the Swiss insurer's portfolio in the country, which revealed that it didn't have enough reserves to cover some "long-tail" insurance claims. Long-tail insurance is often taken out by doctors and architects to protect them against possible negligence cases, which can take up to 20 years to resolve.
The hit also involved the writing off some deferred-acquisition costs--the price associated with the initiation of new insurance contracts.
The Swiss insurer, like many of its peers, has been hit hard by the European economic crisis, as cost-conscious consumers have shunned expensive items that require insurance such as cars. Meanwhile, as central banks the world over have kept interest rates at record lows to stimulate growth, income from investments has declined.
Zurich said it is "engaging external experts" to help shore up its German operations. It added that its overall strategic goals are on track, and its other businesses are meeting their targets.
Analysts voiced surprise at the latest hit, estimating that it would represent about 10% of Zurich's estimated nine- month earnings. The insurer is scheduled to report its third-quarter results on Nov. 15.
"This is very disappointing news as the company seems to have written business without proper modeling and risk assessment," said Fabrizio Croce, an analyst at Kepler Capital Markets, who has a "hold" rating. "Germany is a very tough and competitive market, and for Zurich the long-tail part--which in this case is medical and architectural insurance--was a very niche part of it.
"Zurich didn't devote enough management attention or develop the best underwriting system for this niche market, which was a problem. Then in a crisis, people make more claims, which makes the situation worse and explains why Zurich has had to increase its reserves to deal with it."
Other analysts cut their ratings, with Sarasin reducing Zurich to "neutral" from "buy," while Bank Vontobel also lowered its recommendation to "hold" from "buy."
The charge follows a series of write-downs in Germany during recent quarters. Zurich had to increase its reserves through charges of $100 million in the third quarter of last year and $120 million in the fourth. It also increased its reserves by $100 million in the second quarter of 2012.
"Even though this is arguably something which is unlikely to be repeated in the future, the fact it suggests the process of getting to the bottom of the issues in Germany isn't yet complete will leave some uncertainty in the market," said Sarasin analyst Martin Schwab.
Mr. Croce said neither overall profitability nor the company's dividend are likely to be in danger, as the claims are limited and there are no significant larger losses.