General Electric: The Next Enron?

[Dewey_Finn]

What about Disney?

[F.U.Shakespeare]

@Bosda_Di_Chi_of_Tricor

Disney.
:smack:

I like it: GE could save money by freezing people when they need LTC.

[F.U.Shakespeare]

@Fotheringay-Phipps

The report’s discussion of GE’s deteriorating LTC experience is also deceptive.

On Slide 40, the report demonstrates deteriorating experience in the form of worsening cash flow. But any fixed-rate closed group of long term LTC (or life insurance) contracts will show worsening cash flow over time, as increased morbidity and mortality catch up and overtake the level premiums. The way these are supposed to work is that reserves built up in earlier years (plus investment returns) offset the increased costs of later years. So the proper way to measure experience in later years is how that experience compares with assumptions used in pricing, and how they compare to the reserves being held for those policies. Simply pointing to increasing cash flow in a vacuum is misleading.

Similarly the repeated assertions on subsequent slides that experience is bound to deteriorate further since the population is aging is only valid if you’re looking at “dollars paid out in future years versus dollars paid out in the current year”. But again, the proper comparison is “dollars paid out in future years versus dollars projected to be paid out in future years”, and increasing age does not necessarily imply that the future experience will be worse than current. Even if dollars paid out increase in the future, the experience could still be favorable (& the reserve be overly conservative) if the dollars paid out doesn’t increase as much as current projections say they will.

I think the Kansas Insurance department is onto something here. This report is at a minimum overly sensational and at least to some extent is based on either surprising ignorance of basic insurance concepts or – more likely - plays to the expected ignorance on the part of its intended readership.

So, if it’s a closed group, does that mean they’re not selling new policies?

If not, why wouldn’t they? Wouldn’t that neutralize the worsening cash flow?

[JohnT]

F-P makes some very good points and I’ll address some of them later tonight, tomorrow, but I would like to note that for these type of policies, increased mortality is a Godsend for the insurer on these lifetime benefit contracts.

[Melbourne]

@glowacks

General Electric being involved in reinsurance makes almost no sense. It has absolutely nothing to do with any sort of electrical or mechanical product that they are known for. It was simply a business they got into because they could, apparently without any of the corporate culture behind how to actually run a reinsurance business. Their lack of ability to recognize bad deals in this market is now causing the entire establishment to suffer from it. If this stuff is true, they will go bankrupt, and those that lent to them will be in possession of some possibly profitable businesses instead of cash.

I’m not an investor, so take this only as opinion, not fact, but my understanding is that GE is a finance/investment company, and has been for many years. The general electric part of the company has been a sideline for years.

At least, that’s what I was told in the 1980’s

[Fotheringay-Phipps]

@F.U.Shakespeare

So, if it’s a closed group, does that mean they’re not selling new policies?

If not, why wouldn’t they? Wouldn’t that neutralize the worsening cash flow?

It wouldn’t neutralize the worsening cash flow. If anything, it would make it worse.

The issue is the need for reserves. The main point of reserve requirements is to avoid strategies of this sort, where companies sell policies which throw off extra cash in the early years and spend this money elsewhere, leaving not enough to pay the claims in later years. So insurers are required to keep enough of the excess in reserve so as to be assured that they’re able to pay the claims in later years. So to the extent that GE decided to sell new policies, then the low expected claims in the early years would be offset by the need to keep an excess in reserve, and they couldn’t use this excess to “neutralize the worsening cash flow”.

In theory (more below), if these new policies were profitable then they could use the profits to neutralize the worsening cash flow, but the important thing is that profit for this purpose is not “premiums minus payouts & expenses” but “premiums minus payouts & expenses minus increased reserve requirements”. It’s not any better than trying make profits elsewhere selling wind turbines or dishwashers or whatever, and if GE made a business decision to get out of the LTC insurance business, then there’s no specific cash flow reason to stay in it.

But in reality, it’s even worse than that. Because reserve requirements are very high. The regulators are not about the company’s reserves being expected to be enough to pay claims. They’re about making sure they’re enough to pay claims, and there’s quite a lot of margin involved in that. This is in fact the primary difference between Statutory accounting and GAAP accounting, which the HM report discusses (Apparently, GAAP accounting is adopting STAT methodology for LTC, which itself requires GE to increase reserves by about $10B. This is an accounting change, and actual experience may or may not play out in line with the STAT assumptions; the point made by the GE guy quoted in a prior post.) GAAP accounting is about capturing the accurate value of the business, and is based on “what’s the likely expected value?”. STAT accounting is about making sure the insurer is solvent, and is therefore more conservative assumptions, in addition to the explicit reserve margin. As a practical matter, this means that writing new policies requires an increase in reserves greater than the expected profit, and therefore puts a strain on company capital, rather than helping it. This is so even if the policies are expected to be profitable - the profit would have to emerge over the course of the policy lifetimes, but in the immediate short term are costly. (This is one of the reasons insurers seek reinsurance to begin with - they want to build market share with a popular product, but don’t want to put to much strain on their capital reserves.)

[Fotheringay-Phipps]

@JohnT

F-P makes some very good points and I’ll address some of them later tonight, tomorrow, but I would like to note that for these type of policies, increased mortality is a Godsend for the insurer on these lifetime benefit contracts.

It’s morbidity in the case of LTC insurance and mortality in the case of life insurance, but conceptually it’s the same issue.

[Bosda_Di_Chi_of_Tricor]

@Dewey_Finn

What about Disney?

@F.U.Shakespeare

I like it: GE could save money by freezing people when they need LTC.

Disney overstated earning by billions.
SEC getting involved.

https://www.marketwatch.com/story/disney-whistleblower-told-sec-the-company-inflated-revenue-for-years-2019-08-19

[Sage_Rat]

@Bosda_Di_Chi_of_Tricor

Disney overstated earning by billions.
SEC getting involved.

Disney whistleblower told SEC the company inflated revenue for years - MarketWatch

Sounds more like she’s complaining that low-level grunts are using the data entry/finance systems incorrectly than that there’s an underhanded scheme to cook the books. Probably they just need better training and a more user friendly system for their workers. Most of their work force, at the parks, are probably students doing part-time work. It’s not a group of finance wizards.

[JohnT]

F-P, unless something dramatic happens in the next weeks, it looks like you made the call on this one. Wonder if COVID had an impact?

[Tired_and_Cranky]

I remember reading this thread when it first came up and being impressed with Fotheringay-Phipps’s analysis but I didn’t know enough about the underlying issues and I didn’t have the time (or financial interest) to come to an informed opinion. It’ll be fun watching for the next couple of weeks to see if Markopolos is proven right. It does seem unlikely.

It’s also quite possible that COVID-19 has helped to bail out long term care economics by killing some policyholders a lot quicker and cheaper than actuaries expected.