Markopolos is the guy who uncovered Madoff so he has some credibility. He alleges that GE has commited $38 Billion in Accounting Fraud, by collecting premiums on long term care insurance since the 80s without holding back enough or any capital to pay for those who need them 30-40 years later (now).
The GE Capital insurance unit with the largest losses is ERAC and that unit’s average policy-holders’ age is now 75. The losses in this unit led to GE’s unexpected late 2017/early 2018 $15 Billion reserve hit. Unfortunately, the fast approaching 5-year age group between 76-80 will see a 77% increase in LTC claims filed which will see GE’s losses increase several-fold. We expect to soon see loss ratios of 750% to 1,000% or more on some of GE’s reinsurance agreements. According to industry data, approximately 86% of GE’s LTC claims are ahead of them and the accompanying losses are growing at an exponential and un-survivable rate.
GE ’s cash situation is far worse than disclosed in their 2018 10-K, in fact once GE’s $9.1 Billion accounting fraud tied to its Baker-Hughes GE (BHGE) acquisition is accounted for, GE only had $495 Million in cash flow from operating activities in 2018 and it ended the year with MINUS $20 Billion in working capital. After we accounted for the $38 Billion in accounting fraud GE’s debt to equity ratio goes from the 3:1 ratio it reported at the end of the 2nd quarter 2019 to a woefully deficient 17:1.
He says its analog to AIG, where they collected the premiums and accounted them as profit and payed them out as dividend, because they didn’t think a rogue wave could hit them.
GE LTC story is very similar to AIG’s Financial Products Corporation (AIGFP) and how that ill-fated unit destroyed AIG’s share price and resulted in a $189 Billion government bailout to keep AIG alive. For many years AIGFP sold credit default swaps, took the premiums as “earnings” and never set aside proper reserves until the 2007-2009 Global Financial Crises revealed that the underlying securities AIGFP was guaranteeing were anything but the solid credits AIG thought they were. AIG’s stock price enjoyed those “earnings” for many years until the risks became apparent too late for AIG to survive without government assistance.
GE’s LTC reinsurance units are part of GE Capital (GEC), and GEC was very happy to imprudently account for LTC insurance premiums as “earnings” in the 1980’s, 1990’s and 2000’s while policy-holders were still young and weren’t filing claims. GE continuously failed to fund adequate reserves to offset its LTC liabilities, allowing itself to book billions in “earnings” over a period of decades and pay dividends to the holding company and then to shareholders.
If this short thesis (website link if pdf is not working) is correct, f*ck the news about bankruptcy, those people who are dependent on the long term care insurance now or imminent future and paid in the last 30 years will be f*cked over so bad its undescribable.
Disclaimer: Consult your financial professional before making any investment decision.