Material Impact
Recent long-term care deals show just how difficult -- and costly -- it might be for GE. In August, CNO Financial agreed to pay $825 million to Canada Pension Plan Investment Board’s Wilton Re to get some of its long-term care policies off its books. The commission was equal to 30 percent of the $2.7 billion in reserves that CNO set aside for those policies, which Evercore said were among the “safest” in the industry. By comparison, the money GE needs just to cover its shortfall is more than five times CNO’s reserves.
“The problem is there’s still just a very significant amount of uncertainty over the correct assumptions that should be used to properly value the reserve,” according to Ryan Krueger at Keefe Bruyette & Woods.
Accounting changes could also have a material impact on GE. Starting in 2021, more stringent requirements will obligate firms to update liability assumptions and disclose their effect on earnings each year. Current rules often let them kick the can before disclosing one big charge all at once. Another tweak involves changing the rate that firms use to determine how much they need to cover future liabilities -- from a self-reported assumption to a market rate.
The insurance business is “a liability that is difficult to get one’s arms around,” S&P Global Ratings’ Matt Carroll said.
This article was provided by Bloomberg News.