NEW YORK (Reuters) – General Electric Co (GE.N) ranks among the riskiest backers of long-term care insurance, suffering from both high exposure to claims and a relatively small cash pile to pay them, Fitch Ratings said in a report on Tuesday that sent GE’s shares tumbling.
The Fitch report, which the credit rating agency produces annually, echoed concerns raised last week by financial investigator Harry Markopolos, who estimated that GE has under-reserved by $29 billion for its long-term care policies.
GE stepped up its defense of its insurance accounting on Monday.
On Tuesday, the U.S. conglomerate reiterated comments it made on Monday here in response to the Markopolos report. “Our current reserves are well-supported for our long-term care portfolio characteristics,” GE said. It provided details about how it set key assumptions used in determining its level of reserves.
GE shares were down more than 3% at $8.40.
The reports by Markopolos and Fitch reignite debate about whether GE has set aside enough money to cover its long-term care liabilities or will need to put up many billions more, potentially upending its plan to strengthen its fragile finances.
To deal with GE’s debt load of $105 billion and low cash inflow, Chief Executive Officer Larry Culp is selling businesses to pay down debt. Analysts said any money diverted to reserves could constrict how much Culp could cut GE’s debt.
Goldman Sachs said on Monday that its analysis showed GE’s reserves were likely adequate. “We continue to view GE’s block as having high reserves on a relative basis to peers,” Goldman wrote. In March, Reuters similarly found GE’s reserves were in line with comparable insurers.
But others said long-term policies differ significantly in benefits and costs to insurers. In general, long-term care coverage, which pays for assisted living and nursing home stays, has turned out to be far more expensive than insurers assumed when they sold policies decades ago, and has tipped some insurers into financial loss and even bankruptcy.
Fitch said its analysis found GE and many other insurers still have not set aside enough money to cover losses expected on long-term care policies, which are unusually risky because the costs are volatile and vulnerable to interest rate changes. Even insurers that have taken a more conservative stance and set aside more money than GE have not avoided losses, Fitch said.
But GE also has “very high” exposure to long-term care for more than 250,000 retirees and others who receive benefits paid for by such policies, Fitch Ratings analyst Anthony Beato told Reuters.
GE ranked second on Fitch’s list of the 16 riskiest long-term care insurers, just below Genworth Financial Inc (GNW.N), a company that GE spun out in 2004. The other insurers cited as having below average reserves and very high exposure are Unum Group (UNM.N) and Senior Health Insurance Co of Pennsylvania, Fitch said.
In a statement, Genworth said its believes its reserve-setting process is appropriate and that it strong disagrees with Fitch’s view that its assumptions about future premium increases are too optimistic.
Unum did not comment on the content of the Fitch report. Senior Health did not respond to requests for comment.
GE scored high, Beato said, because it has mostly older policies written when the costs of long-term care were poorly understood. A large portion of GE’s policies also provide lifetime benefits and some contain inflation protection benefits.
“When you compound all of that together, (GE’s portfolio) looks much riskier than what the rest of the industry maintains,” Beato said.
GE’s insurance group also has only about $1 billion in capital on a statutory accounting basis, Beato said. While GE, as the parent, has put in money to shore up reserves in the past, Fitch did not factor that into its rankings because it wanted a comparison of reported statutory capital levels across the industry, Beato said.
“Should GE have to increase reserves further, the capital base continues to be dwarfed by this very large exposure” at GE’s insurance operating subsidiary, Beato said.
Last week, GE audit committee chairwoman Leslie Seidman said Markopolos’ analysis was not accurate. “I’m not sure (he) really understands the accounting in this area,” she said in an interview on CNBC.
GE did not make those comments about Fitch’s report on Tuesday, but said it stood by its own accounting.
Reporting by Alwyn Scott; Editing by Nick Zieminski and Rosalba O’Brien