Markopolos cited the
effect of new standards for how companies account for long-term care policies
Aug
16, 2019 @ 5:02 pm By Bloomberg
News
Harry Markopolos shocked General Electric Co. investors Thursday when
he accused the industrial giant of needing $29 billion more in funds for its
insurance business. While GE disputed the charges, his analysis underscored how
sweeping accounting changes coming in the next few years are raising questions
for the life insurance industry.
The fraud examiner, who is known for calling out Bernie Madoff's scheme, said that
the proposed new accounting rules could require GE to record a $10.5 billion
non-cash charge for its book of insurance policies. GE itself has warned that
the new standards could have a material impact, but the company hasn't yet
quantified the changes and said it believes its reserves are
"well-supported."
Many insurers have yet to detail exactly how
the accounting tweaks, which are more than 10 years in the making, will hit
them. But some companies have warned that they have a lot of work ahead to prepare.
The new standards revolve around how life
insurers account for long-term care policies, a type of contract that pays for
home health aides or nursing home stays, as well as other contracts such as
annuities and life insurance.
It's another complication for insurers who
sold or backstopped long-term care policies, which have proven challenging for the industry in recent years because
of higher-than-expected costs and low interest rates. The accounting changes
were set to take place in 2021, but the Financial Accounting Standards Board
has endorsed a plan to delay implementation a year.
Here are some of the changes the industry is
gearing up for:
• Insurers were previously able to use a
discount rate in calculations that was based on the expected yield on their
investments. With the updates, the companies will have to use the yield on an
"upper medium-grade" fixed-income asset.
• Assumptions used to measure liabilities will
be reviewed and updated annually if needed. Previously, those had been locked
at the beginning of the contract.
• FASB says the new changes also require
better disclosures about assumptions the companies make and how those can
change.
Mr. Markopolos's report focuses solely on GE
and doesn't analyze how the changes will impact any other insurers. Still,
executives at Prudential
Financial Inc. and MetLife Inc. are
among insurance leaders that have been fielding questions about the changes
from analysts.
Prudential CFO Ken Tanji said in May that it
was too early to comment on how they'll impact the insurer. MetLife CFO John
McCallion has expressed support for delaying the new standards, which the
company has warned could have a material impact on its financial statements.
Prudential and MetLife spokesmen declined to comment beyond the previous
statements.
Peer benchmarking
Evercore ISI analysts led by Tom Gallagher
said Thursday in a note that it's reasonable to assume that GE might have to
take a non-cash charge because of the accounting changes.
But Evercore's analysts pushed back on another
part of Mr. Markopolos's report that alleges the industrial giant needs $18.5
billion more in money set aside to pay claims for those insurance policies if
benchmarking it to a peer such as Prudential.
"The characterization of GE as having
material underreserving vs peers is a mischaracterization of the reality of the
situation in our view," the Evercore analysts said in a note.
GE CEO Larry Culp on Thursday called Mr.
Markopolos's claims "market manipulation" and said the fraud examiner
didn't contact the company, while a board member said there were
"downright mistakes" in his analysis. Mr. Markopolos, who is working
with a third party, stands to gain from a drop in GE's shares.
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