ZURICH (Reuters) - Switzerland's Zurich Insurance Group ZURN.VX will take a $550 million hit to third-quarter pretax profit after a review showed its German arm had not set aside enough money to cover potential claims made years after policies have expired.
The company said on Wednesday the hit also covered writing off some deferred costs of buying new business, without elaborating.
Many insurance claims, such as cases involving long-term illness or medical negligence, are not made until years after a policy has expired, and insurers routinely put money aside to cover these so-called "long tail" liabilities.
"This is clearly a negative for Zurich in the near term financially and reputationally as the reserving issues of Zurich have long been considered a thing of the past," said Espirito Santo analyst Joy Ferneyhough, referring to the firm's previous efforts to strengthen its preparations for future liabilities.
"The size of the charge is eye opening but not likely to challenge the dividend and we would still expect a positive operating profit for Q3 stand alone."
At 0910 GMT, Zurich shares were down 4 percent at 234.6 Swiss francs, underperforming a slightly weaker Stoxx Europe insurers index .SXIP.
Zurich said the adjustments would be included in its nine-months results to September 30 and estimated the after tax impact was $390 million.
"Zurich's leadership is disappointed with this significant financial adjustment and has taken the necessary steps including engaging external experts to validate the remediation actions being taken in Germany," it added.
Vontobel analyst Stefan Schuermann said the adjustment was surprising, and downgraded his rating on Zurich stock to "hold" from "buy", trimming his price target to 250 Swiss francs from 260 francs. Bank Sarasin also downgraded the shares.
Zurich said its other businesses continued to perform as expected and it was progressing well towards its strategic targets. Full earnings for the quarter are due on November 15.
Reporting by Katharina Bart and Martin de Sa'Pinto; Editing by David Holmes and Mark Potter