GE GE Aerospace

By Tatyana Shumsky and Ezequiel Minaya 

General Electric Co.'s bet on selling long-term care insurance policies, which ballooned into a $16.5 billion liability, underscores how policies meant to pay for nursing homes and prescription costs have become one of the most unpredictable segments of the insurance industry.

GE's skyrocketing liability is but only one example of an industrywide lapse in judgment when assessing the future cost of such care, industry experts said. Prudential Financial Inc., which stopped issuing long-term care insurance in 2012, recorded a $1.5 billion charge related to its portfolio in the second quarter. Genworth Financial Inc., which is among the roughly dozen companies still offering this type of insurance, has incurred more than $3 billion in losses stemming from these plans.

GE in January reported a $6.2 billion charge linked to liabilities for long-term care insurance policies, which prompted federal regulators to expand a probe into the company's accounting practices. The company has said it is cooperating with investigators.

The Wall Street Journal reported Friday that former GE employees told federal investigators that the company failed to acknowledge worsening results in the insurance business.

GE also faces shareholder lawsuits alleging that it understated risks related to its insurance operations.

"We are exploring every option to manage and mitigate risk from the company's legacy insurance liabilities," said a GE spokeswoman, who declined to comment on specifics of ongoing legal matters. "We have a strong commitment to integrity in our controllership and financial reporting."

Insurers make the bulk of their money from the premiums charged to policyholders and from investing those premiums before paying out claims. Forecasting the future payout for long-term-care policies can prove particularly difficult.

That calculation involves census data, actuarial science and mortality rates, among other mercurial variables. But it also requires guesswork around the future price of health care.

"Assisted living, health care and prescriptions -- the inflation rate in those things is massive," said Peter Bible, a partner and chief risk officer at accounting firm EisnerAmper LLP.

Muddying the math is the unpredictable nature of regulation, which could affect the portion of costs shouldered by the government. "It's very complicated science," said Mr. Bible, a former chief accounting officer at General Motors Co.

In recent decades, many long-term care plan providers underestimated the payouts they would face when plans came due and didn't charge high enough premiums. Companies also misjudged how long claims would be paid out as consumers lived longer.

Moreover, the low interest-rate environment during the past decade has dented the investment returns of insurance companies.

"Who could have predicted interest rates would have been this low for this long," said Jesse Slome, executive director of the American Association for Long-Term-Care Insurance.

The dozen companies that offer a long-term care product include Northwestern Mutual, Mutual of Omaha and Transamerica Corp., according to Mr. Slome, down from about 75 in the 1980s, when long-term-care insurance became popular.

Insurance companies have recorded more than $28 billion in charges related to long-term care insurance policies since 2007, according to estimates by analysts at investment bank Evercore ISI.

Changes in GE's risk assessment and assumptions triggered a $6.2 billion charge related to the insurance portfolio, the company explained in a January conference call. At the time, GE estimated it will need to contribute roughly $15 billion to its insurance business over the next seven years.

GE stopped selling long-term care policies in 2006, but the company hadn't reassessed the assumptions behind the likely risks of these plans until 2017, said Ryan Zanin, GE Capital's chief risk officer at the time, during the call.

GE Capital is the company's financial services unit. Mr. Zanin left GE in June to pursue opportunities outside the company, a GE spokeswoman said.

GE performed an annual test to ensure future premiums and reserves would cover future claims, as required by regulators. Because the company cleared the hurdle in previous years, it had to leave in place existing risk assumptions, Mr. Zanin said on the call.

That changed in 2017, however, when a surge in claims by one segment of GE's insurance portfolio triggered a review. The policyholders in that block were approaching 80 years or older, when the bulk of claims tend to arise, Mr. Zanin said.

"Virtually, the entire industry has experienced greater claims than originally anticipated where more people go on claim and for longer than expected," he said on the call.

Prudential's charge, reported in August, followed a similar annual review of the profitability of its remaining long-term care portfolio. A Prudential spokesman declined to comment.

Genworth Financial, which was spun off from GE in 2006, has incurred a cumulative statutory net loss of over $3 billion as of Sept. 30, stemming from its legacy long-term care insurance business.

Genworth continues to lose hundreds of millions on these legacy blocks each year, a company spokeswoman said.

The company evaluates its assumptions annually and has taken a proactive approach to premium increases, achieving approximately $10 billion in approved rate increases on some of its newer products, the spokeswoman said. The company is also working with regulators to adopt a system of re-rating long-term care premiums annually, in a way that is similar to how insurers adjust premiums on homeowners, auto and health insurance, the spokeswoman said.

GE is seeking ways to mitigate its exposure to long-term care insurance, the company's executives have since said.

GE was expected to perform in the fourth quarter the annual reserves-adequacy test, the inputs for which were reset last year. In advance of that, GE management anticipated an additional capital infusion of $3 billion into the insurance business in 2019, GE finance chief Jamie Miller said on an earnings call in October.

Write to Tatyana Shumsky at tatyana.shumsky@wsj.com and Ezequiel Minaya at ezequiel.minaya@wsj.com

(END) Dow Jones Newswires

December 03, 2018 14:01 ET (19:01 GMT)

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