GE GE Aerospace

By Leslie Scism 

Worries about the health of the long-term-care insurance industry have nettled investors for years. General Electric Co.'s comments show the problem isn't going away soon.

The Boston company on Friday cut its earnings forecast for the year, citing poor results at units including its power division. The company also said results could be hit by a reassessment of an insurance unit's prospects -- a remark that came as a surprise to some, given that GE years ago spun out a business closely identified with long-term care, now known as Genworth Financial Inc.

A GE executive on the company's conference call Friday morning said the firm has actuaries combing through its long-term-care insurance reserves in "a very complex exercise" to figure out if they are deficient.

GE still has billions of dollars in reinsurance obligations on its books from coverage it sold to other insurers that had sold policies to consumers. By doing so, GE took on some of those carriers' responsibilities for paying claims, according to analysts. The risk for GE and others is whether carriers that sold long-term care policies have adequate reserves to pay future claims.

Until the review is completed, GE is halting dividends from its GE Capital unit to the parent, which has fueled concerns about whether the company will maintain its common-stock dividend. GE is aiming to conclude the review before year-end.

If GE proceeds with an outsize charge, it "may result in a negative read across" a wide range of other companies with long-term-care reserves, said analysts at securities firm Evercore ISI in a recent report. Their report followed GE's disclosure this summer of the review, when it noted "adverse claims experience."

Evercore said long-term-care is "one of the larger balance-sheet concerns" at insurers including Genworth, Manulife Financial Corp. and Unum Group. The three companies declined to comment.

Evercore said its analysis of GE's regulatory filings indicates the company likely has "a deficiency of 20% or more" in its long-term-care reserves, which could mean a charge of $2.5 billion or more.

Long-term-care insurance took off in the early 1990s. The policies had strong appeal to older people, and many insurers thought they had the perfect product to profit from people's concerns about becoming unable to care for themselves and outliving their savings.

In general, the policies pay for nursing homes, assisted living facilities or health-care aides in people's private residences. Such care generally isn't paid by the Medicare health-insurance program for older people, while the state-federal Medicaid program is for the poor.

Some early versions of long-term-care policies provided lifetime benefits.

But by the mid 2000s, many insurers were rapidly ratcheting back the benefits, concluding they had badly miscalculated how many people would file claims and how long they would draw benefits before dying, among other things.

Many insurers have obtained regulatory approval for double-digit premium-rate increases on existing policyholders. Insurers say that even those increases generally fall short of what is needed to bring their older books of business back to break even in profitability.

Industrywide, insurers have taken billions of dollars of charges over the past decade. Genworth, which was spun off from GE in 2004, has tallied losses from its older long-term-care policies of $2.5 billion since 2006.

GE assumed the liabilities it now is analyzing through a series of reinsurance agreements, Evercore said. GE quit selling reinsurance policies some years ago.

GE said Friday that its long-term-care reserves total about $12 billion, about half of its total insurance reserves.

Evercore said its analysis of GE's regulatory filings with state insurance departments showed that claims were running far higher than GE had expected.

"While this is not the worst block out there, we still view it as one of the riskier ones given that these policies were likely written in the late 1980s/early 1990s," Evercore said of one large part of GE's book of business.

Aside from miscalculations about claims volume, insurers are also battling the impact of ultralow interest rates. Insurers count on investing premiums until needed to pay claims, and long-term-care premiums typically are invested for years, if not decades, before customers file their claims. Genworth has said it priced many older policies on the assumption the company would earn 7.5% a year on invested premiums. But new premiums are being invested today at about 4.25%.

Write to Leslie Scism at leslie.scism@wsj.com

(END) Dow Jones Newswires

October 23, 2017 05:44 ET (09:44 GMT)

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