GE’s surprise $15 billion shortfall was 14 years in the making
The trouble at General Electric began decades ago when a hole started to form inside its sprawling financial unit.
The hole became a $15 billion shortfall in insurance reserves, disclosed last week. It’s prompted a Securities and Exchange Commission investigation, called into question the oversight of GE leadership, pushed down the share price, and shocked investors who were asking Wednesday how this icon of American capitalism could allow the situation to deteriorate to this point.
“It sure seems that previous management had a rosy view,” said Scott Davis, an analyst with Melius Research in New York. “There seemed to be no effort on their part to get ahead of the liability. I find it very hard to believe that mysteriously overnight GE found problems they didn’t know existed.”
A representative for Jeffrey Immelt, who was GE’s chief executive officer from 2001 to 2017, declined to comment.
In 2004, GE spun out an insurance unit, Genworth Financial Inc., through a stock offering. The move was important to the parent company. It helped eliminate one of the biggest drags on GE’s earnings.
At the time, advisers told GE the share sale could run into obstacles. Some Genworth businesses were too weak for investors’ tastes. GE would need to backstop them. GE agreed to reinsure some of Genworth’s long-term-care insurance.
The company, then run by Immelt, raised $3.53 billion in its first Genworth share sale. The insurer’s stock rose 67 percent by the time GE sold the last of its stake for $2.8 billion in 2006.
Long-term-care insurance is a business that’s gotten tougher over the years. Policyholders are living longer. Medical costs have risen. Some insurance companies have quit selling the product altogether. Genworth has taken write downs to shore up the business with cash reserves. GE is certainly not the first company to get its assumptions wrong, and the insurance policies date as far back as the 1980s. No new contracts were written after 2006.
But GE didn’t change its assumptions in a big way — a decision that baffled industry veterans.
A warning sign
Genworth announced a revamp of its actuarial assumptions in 2014 after a calculation error, leading to a $1.2 billion loss for the year. It was a warning sign to the industry that long-term-care insurance policies were more toxic than initially thought. It also captured the attention of people familiar with the GE reinsurance contracts. They asked, why Genworth was revising its assumptions while executives at the financial conglomerate mostly left theirs alone.
Boston-based GE added at least $1 billion to its reserves over five years to mitigate some operating losses, according to a July report by ratings firm A.M. Best. Over a decade, the company contributed about $4 billion, said a person familiar with the situation.
Some employees were aware that long-termcare insurance was in bad shape. And even as it sold the bulk of its finance business, executives resisted selling reinsurance assets, even when bankers encouraged them.