The U.S. Securities and Exchange Commission is investigating a $6.2 billion charge for the accumulation of insurance liabilities at General Electric’s finance business and some of the manufacturer’s other accounting practices.
The insurance charge, related to a life and health business where claims are increasing as policyholders grow older and sicker, was announced just a week before the digital-manufacturing giant reported quarterly earnings.
Larger than at least one analyst expected, it followed a comprehensive review begun in 2017 that focused on coverage for long-term care. GE said it will also have to build insurance reserves by $15 billion over seven years, starting with a $3 billion payment this year.
“We are cooperating fully with the investigation, which is in the very early stages,” Chief Financial Officer Jamie Miller told investors on Wednesday.
Regulators are also reviewing how the Boston-based company records income from lucrative long-term service contracts, agreements that cover maintenance of its equipment and span years.
Miller, a former chief of the locomotive-building division who moved into her current role after Jeff Bornstein stepped down last year, said she has spent a considerable amount of time during her tenure at GE working with service agreements.
“This is something, at the company level, we have really exhaustively reviewed,” she said.
Since becoming CFO, Miller has undertaken her own thorough evaluation of the company’s financial processes and “there is nothing here I’m overly concerned about,” she said. “But, look, if I see something, I’ll deal with it. But I don’t see anything at this point.”
As for insurance, former CEO Jeffrey Immelt pulled out of the bulk of that business more than a decade ago, selling $130 billion in policies but retaining some units, such as reinsurer North American Life and Health, the operation responsible for the onerous charge.
Reinsurers provide backup for so-called primary insurers, taking on some of the risk from massive payouts that would stretch issuers’ resources.
GE’s reserve increase was necessary because of long-term care policyholders at client companies who bought coverage decades ago, when they were younger and in better health. They are now making higher-than-anticipated claims to cover expensive new treatments and for longer periods of time, since medical advances have prolonged life expectancy.
“The charges and scope of the problem are significantly worse than we had anticipated,” Deutsche Bank analyst John Inch said in a note to clients last week.
“Given GE’s weak track record at accurately assessing its future exposures for GE Capital businesses,” he added, “future charges could still be forthcoming both for GE’s insurance businesses and other billions of dollars of remaining GE Capital liabilities such as mortgages, unfunded pension, etc.”
