Harry Markopolos shocked General Electric Co. investors Thursday when he accused the industrial giant of needing $29 billion more in funds for its insurance business. While GE disputed the charges, his analysis underscored how sweeping accounting changes coming in the next few years are raising questions for the life insurance industry.
The fraud examiner, who is known for calling out Bernie Madoff's scheme, said that the proposed new accounting rules could require GE to record a $10.5 billion non-cash charge for its book of insurance policies. GE itself has warned that the new standards could have a material impact, but the company hasn't yet quantified the changes and said it believes its reserves are "well-supported."
Many insurers have yet to detail exactly how the accounting tweaks, which are more than 10 years in the making, will hit them. But some companies have warned that they have a lot of work ahead to prepare.
The new standards revolve around how life insurers account for long-term care policies, a type of contract that pays for home health aides or nursing home stays, as well as other contracts such as annuities and life insurance.
It's another complication for insurers who sold or backstopped long-term care policies, which have proven challenging for the industry in recent years because of higher-than-expected costs and low interest rates. The accounting changes were set to take place in 2021, but the Financial Accounting Standards Board has endorsed a plan to delay implementation a year.
Here are some of the changes the industry is gearing up for:
• Insurers were previously able to use a discount rate in calculations that was based on the expected yield on their investments. With the updates, the companies will have to use the yield on an "upper medium-grade" fixed-income asset.
• Assumptions used to measure liabilities will be reviewed and updated annually if needed. Previously, those had been locked at the beginning of the contract.
• FASB says the new changes also require better disclosures about assumptions the companies make and how those can change.
Mr. Markopolos's report focuses solely on GE and doesn't analyze how the changes will impact any other insurers. Still, executives at Prudential Financial Inc. and MetLife Inc. are among insurance leaders that have been fielding questions about the changes from analysts.
Prudential CFO Ken Tanji said in May that it was too early to comment on how they'll impact the insurer. MetLife CFO John McCallion has expressed support for delaying the new standards, which the company has warned could have a material impact on its financial statements. Prudential and MetLife spokesmen declined to comment beyond the previous statements.
Evercore ISI analysts led by Tom Gallagher said Thursday in a note that it's reasonable to assume that GE might have to take a non-cash charge because of the accounting changes.
But Evercore's analysts pushed back on another part of Mr. Markopolos's report that alleges the industrial giant needs $18.5 billion more in money set aside to pay claims for those insurance policies if benchmarking it to a peer such as Prudential.
"The characterization of GE as having material underreserving vs peers is a mischaracterization of the reality of the situation in our view," the Evercore analysts said in a note.
GE CEO Larry Culp on Thursday called Mr. Markopolos's claims "market manipulation" and said the fraud examiner didn't contact the company, while a board member said there were "downright mistakes" in his analysis. Mr. Markopolos, who is working with a third party, stands to gain from a drop in GE's shares.