Harry Markopolos — a forensic accounting analyst who warned the U.S. Securities and Exchange Commission, early on, that something was wrong Bernie Madoff's financial statements — says the situation at General Electric's long-term care insurance (LTCI) reinsurance business is much worse than the company has admitted.
Markopolos gives that assessment in a new report on GE.
Markopolos contends that GE has $9.1 billion in accounting issues tied to a non-insurance acquisition; $9 billion in reinsurance company reserve contributions it has to make under a $15 billion agreement with the Kansas Insurance Department; and $18.5 billion in contributions it needs to make to remedy LTCI reinsurance under-reserving that's not covered by the agreement with the Kansas department.
Between now and the first quarter of 2021, when new Generally Accepted Accounting Principles (GAAP) rules take effect, GE will also have to take a $10.5 billion non-cash charge related to the new GAAP rules, according to the Markopolos report.
GAAP rules govern the financial reports prepared by U.S. companies that sell stock to the public.
GE has done less than major competitors to close the gap between its GAAP financial reserves and reserves prepared according to state insurance regulators' Statutory Accounting Principles (SAP) reserves, Markopolos says.
Markopolos also contends that GE has not given securities analysts and others a clear picture of its finances.
Markopolos says he has based his report on public financial reports, news articles and reports; data from the National Association of Insurance Commissioners databases; and data from AM Best databases.
In part because of Markopolos's track record as a Madoff whistleblower, the new report has received extensive coverage from major financial services news organizations, including the Wall Street Journal, Forbes, the New York Times and CNBC.com.
The price of shares of GE's common stock fell 11.3% today, to $8.01, as the S&P500 index was rising 0.25%.
Here are five more things to know about the Markopolos report, for agents.
1. GE is blasting Markopolos's and conclusions.
"The claims made by Mr. Markopolos are meritless," GE said in a statement released today. "The company has never met, spoken to or had contact with Mr. Markopolos, and we are extremely disappointed that an individual with no direct knowledge of GE would choose to make such serious and unsubstantiated claims. GE operates at the highest level of integrity and stands behind its financial reporting."
GE also rejected Markopolos' allegations about its GE Insurance unit finances and financial reporting.
"We believe that our current reserves are well-supported for our portfolio characteristics, and we undertake rigorous reserve adequacy testing every year," GE said. "The future implementation of the GAAP insurance accounting standard does not align GAAP and statutory reserves as Mr. Markopolos alleges, but rather will be dependent on a number of variables that will not affect statutory accounting, which drives our funding requirements."