GE Capital still has billions of dollars of old long-term care insurance (LTCI) reinsurance obligations on its books, left over from the days when it and Genworth Financial Inc. were part of General Electric Company.
GE startled the company’s investors today by announcing that GE Capital will have to add $15 billion to its reserves over seven years, mainly to cope with a trend of adverse claims behavior in its LTCI book of business.
GE Capital managers put their LTCI reinsurance block of business through the same kind of review of actuarial assumptions that managers of other large blocks of LTCI business have conducted in recent years.
(Related: Carrier seeks LTCI rate increases)
The managers have decided that they will have to make what amount to $3 billion in contributions under states’ statutory accounting rules this quarter, and $2 billion in additional contributions each year from 2019 through 2014.
Under the Generally Accepted Accounting Principles (GAAP) rules that publicly traded companies in the United States use, that amounts to a pre-tax charge of $9.5 billion.
Other issuers of interest-sensitive insurance products have also announced large reserve adjustments in recent years, but, over the years, GE has referred to its LTCI reinsurance operations only in passing, in connection with brief references to the “runoff insurance operations” at its North American Life and Health unit. The company acknowledged in November that it was putting the unit through an actuarial review, but investors may not have understood how big a charge for runoff insurance business could be.
John Flannery, GE’s chairman, emphasized in a statement that the company has the cash to make the required contributions without hurting its ratings.
The actions will help GE make the GE Capital unit smaller and more focused, Flannery said in the statement.
“These actions will also help restore GE Capital ratios to appropriate levels,” he said.
Here are five more things to know about the reserve contributions, drawn from documents GE, GE Capital and Genworth have filed with regulatory agencies.
1. GE Capital has three insurance company subsidiaries.
GE Capital is, through intermediate companies, the parent of Employers Reassurance Corp., according to a letter the company sent to the Federal Reserve System board in February 2015.
Employers Re is the parent of Union Fidelity Insurance Company, and Union Fidelity is the parent of Heritage Casualty Insurance Company.
All of the companies are domiciled in Kansas. The Kansas Insurance Department is their primary regulator.
2. The statutory reserve contribution total will be large relative to the reinsurance business asset total.
In the 2015 letter to the Fed, GE Capital said the three Kansas-based insurance subsidiaries ended 2014 with a total of $36 billion in assets.
GE says in an insurance update it provided today, during a conference call, that reserves for LTCI products account for about 60% of the reserves at the reinsurance businesses.
Reserves for obligations related to structured settlement annuities account for 35% of the total, and reserves for life reinsurance and other obligations account for 5%.
3. GE Capital’s Union Fidelity unit still has a relationship with Genworth.
Genworth originally was part of GE Capital. GE Capital spun Genworth off by holding an initial public offering (IPO) for Genworth stock in 2004.
In May 2004, in an IPO document, Genworth noted that it had ceded variable annuity contracts with $2.8 billion in general account reserves and $7.9 billion in separate account reserves to Union Fidelity on Jan. 1, 2004.
The company said Union Fidelity had also accepted structured settlement obligations with $12 billion in reserves, and LTCI obligations with $1.5 billion in reserves.
In the Form 10-K annual report that Genworth filed with the U.S. Securities and Exchange Commission for 2017, Genworth said it ended 2017 with $14.4 billion in reinsurance recoverables with Union Fidelity. That compares with $1.1 billion in reinsurance recoverables at the reinsurer with the second highest amount of Genworth reinsurance recoverables.
4. Union Fidelity reinsures LTCI business originally written by companies other than Genworth.
Genworth noted in the 2004 IPO document that the block of LTCI business it ceded to Union Fidelity on Jan. 1, 2004, was originally written by another company. Genworth said it acquired responsibility for that block through a reinsurance arrangement of its own.
5. GE Capital talked about the Kansas insurance subsidiaries’ assets when it was asking federal insurance regulators to exempt it from the extra layers of supervision required by Dodd-Frank for what the Financial Stability Oversight Council classifies as systemically important financial institutions, or SIFIs.
GE Capital argued that insurance assets are different from traditional banking assets, and that regulators should disregard temporary fluctuations in the market value of the insurance subsidiaries’ assets when looking at GE Capital’s finances.
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