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UPDATE 1-General Electric ranks among riskiest long-term care insurers -Fitch

Tue, 20th Aug 2019 14:50

By Alwyn Scott

NEW YORK, Aug 20 (Reuters) - General Electric Coranks among the riskiest backers of long-term care insurance,suffering from both high exposure to claims and a relativelysmall cash pile to pay them, Fitch Ratings said in a report onTuesday that sent GE's shares tumbling.

The Fitch report, which the credit rating agency producesannually, echoed concerns raised last week by financialinvestigator Harry Markopolos, who estimated that GE hasunder-reserved by $29 billion for its long-term care policies.

GE stepped up its defense of its insurance accounting onMonday.

On Tuesday, the U.S. conglomerate reiterated comments itmade on Monday https://www.ge.com/reports/follow-up-from-last-weeks-notein response to the Markopolos report. "Our current reserves arewell-supported for our long-term care portfoliocharacteristics," GE said. It provided details about how it setkey 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 aboutwhether GE has set aside enough money to cover its long-termcare liabilities or will need to put up many billions more,potentially upending its plan to strengthen its fragilefinances.

To deal with GE's debt load of $105 billion and low cashinflow, Chief Executive Officer Larry Culp is selling businessesto pay down debt. Analysts said any money diverted to reservescould constrict how much Culp could cut GE's debt.

Goldman Sachs said on Monday that its analysis showed GE'sreserves were likely adequate. "We continue to view GE's blockas having high reserves on a relative basis to peers," Goldmanwrote. In March, Reuters similarly found GE's reserves were inline with comparable insurers.

But others said long-term policies differ significantly inbenefits and costs to insurers. In general, long-term carecoverage, which pays for assisted living and nursing home stays,has turned out to be far more expensive than insurers assumedwhen they sold policies decades ago, and has tipped someinsurers into financial loss and even bankruptcy.

Fitch said its analysis found GE and many other insurersstill have not set aside enough money to cover losses expectedon long-term care policies, which are unusually risky becausethe costs are volatile and vulnerable to interest rate changes.Even insurers that have taken a more conservative stance and setaside more money than GE have not avoided losses, Fitch said.

HIGH EXPOSURE

But GE also has "very high" exposure to long-term care formore than 250,000 retirees and others who receive benefits paidfor by such policies, Fitch Ratings analyst Anthony Beato toldReuters.

GE ranked second on Fitch's list of the 16 riskiestlong-term care insurers, just below Genworth Financial Inc, a company that GE spun out in 2004. The other insurerscited as having below average reserves and very high exposureare Unum Group and Senior Health Insurance Co ofPennsylvania, Fitch said.

In a statement, Genworth said its believes itsreserve-setting process is appropriate and that it strongdisagrees with Fitch's view that its assumptions about futurepremium 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 olderpolicies written when the costs of long-term care were poorlyunderstood. A large portion of GE's policies also providelifetime benefits and some contain inflation protectionbenefits.

"When you compound all of that together, (GE's portfolio)looks much riskier than what the rest of the industrymaintains," Beato said.

GE's insurance group also has only about $1 billion incapital on a statutory accounting basis, Beato said. While GE,as the parent, has put in money to shore up reserves in thepast, Fitch did not factor that into its rankings because itwanted a comparison of reported statutory capital levels acrossthe industry, Beato said.

"Should GE have to increase reserves further, the capitalbase continues to be dwarfed by this very large exposure" atGE's insurance operating subsidiary, Beato said.

Last week, GE audit committee chairwoman Leslie Seidman saidMarkopolos' analysis was not accurate. "I'm not sure (he) reallyunderstands the accounting in this area," she said in aninterview on CNBC.

GE did not make those comments about Fitch's report onTuesday, but said it stood by its own accounting.

(Reporting by Alwyn ScottEditing by Nick Zieminski and Rosalba O'Brien)

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