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GE analysts question whistleblower's math, predict small LTC reserve charge

Companies with long-term care insurance blocks have struggled to keep investor confidence in recent weeks amid reports that some LTC books are vastly under-reserved.

The week of Aug. 19, General Electric Co.'s long-term care block came under scrutiny when Harry Markopolos, the investigator who exposed Bernie Madoff's Ponzi scheme, accused the company of running a decades-long accounting fraud, hiding approximately $38.1 billion in potential losses. Of these potential losses, Markopolos claimed that $18.5 billion in new cash would be needed immediately to boost the reserves of GE's long-term care business.

GE's shares plunged Aug. 15 after the report was released. The company has pushed back against the claims. Its current reserves are "well-supported" for its long-term care portfolio's characteristics, a company spokesperson said in an email.

"Our future liabilities depend on variables that will play out over decades, not years, and are assessed using rigorous annual testing processes, sound actuarial analysis and the application of regulatory and accounting rules," the spokesperson said.

GE's shares bounced back almost 10% Aug. 16, the day after the report's release, but an Aug. 20 report from Fitch Ratings also called the company under-reserved against the losses related to its "risky" long-term care business. The stock slipped for a second time.

The rating agency noted that long-term care policies are among the riskiest insurance products because of their volatile performance, high reserve and statutory capital requirements and exposure to risks associated with interest rate changes.

But regulators and analysts have questioned the Markopolos report. In an Aug. 19 statement, the Kansas Insurance Department said the report does not "appear to incorporate certain technical reserve considerations that were considered during the Department's most recent financial examination."

"Components of this particular report appear fairly simplistic in nature," the regulator said.

RBC Capital analyst Deane Dray agreed with the characterization of the report as "oversimplified." The report says that GE's reserve assumptions are not as conservative as peers, but Dray said the author left out important factors in his analysis.

"There are so many more elements about the policies — the actual book, mortality rates, mortality assumptions and all those elements that go into the reserve," Dray said. "He didn't take those into account."

Morningstar analyst Joshua Aguilar said he could see GE taking a small reserve charge. But overall, Markopolos was "wrong on his math," the analyst said.

"They'll probably have to contribute some more money, I just think it's not due all at once," Aguilar said. "The magnitude of the problem isn't as big."

Derryck Coleman, research manager at Audit Analytics, said a small reserve charge would be reasonable to expect. He also pointed out that GE CFO Jamie Miller recently announced her departure, and her successor being named could be the impetus for a charge to coincide with the new management.

GE ended the week down 9.22%.

The broader market continued to swerve during the week, following a sell-off the prior week when the yield on 10-year Treasurys slid below the 2-year. The S&P 500 finished down 1.43%, while the SNL U.S. Insurance Index dropped 3.08%, for the week ending Aug. 23.

Unum Group has recently also had its fair share of investor concern around long-term care. As Credit Suisse analyst Andrew Kligerman initiated coverage on Unum in early July, he also announced that his proprietary analysis showed the company's long-term care block to have a $5.7 billion after-tax reserve deficiency at net present value. Unum ended the week of Aug. 23 with a decline of 2.17%, and the life insurer's stock has dropped about 20% since Kligerman's coverage initiation July 10.

There are several factors driving the stock's performance, but the biggest issue is still the long-term care business, Kligerman said in an interview.

"The issue remains that the company appears under-reserved in long-term care and investors have concerns," Kligerman said, adding that the declining interest rates are only adding to that concern. Unum has said it disagrees with Kligerman's analysis.

Several other life insurance companies fell during the week, though some outperformed the broader insurance index's drop. Voya Financial Inc. and MetLife Inc. saw their shares fall 0.43% and 1.68%, respectively.

Genworth Financial Inc. booked a 1.86% improvement for the week.

Aflac Inc. saw its shares drop after a report said JAPAN POST Co. Ltd. improperly sold approximately 104,000 Aflac-issued policies. Aflac has since announced that it is expecting a decline of as much as 50% in Japan Post group channel sales for the rest of 2019. The life insurer ended the week down 8.15%.