GE's Surprise $15 Billion Shortfall Was 14 Years in the Making

Calculation Error

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-term-care 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.

Doing so would have forced GE to book a huge charge to reflect a drop in value, according to people with familiar with the situation who asked for anonymity because they weren’t authorized to speak. That was an indication that the business was worth less than what GE reported to investors, the people said.

Suspend Dividends

GE disclosed last year that it was reviewing the long-term-care business and would suspend dividends paid to the parent company. In November, while the process was still underway, Chief Financial Officer Jamie Miller said the company would likely take a charge of more than $3 billion.

When GE disclosed final results last week, Wall Street was shocked by the magnitude of the financial hit — a $6.2 billion charge against earnings and $15 billion to be put into reserves over seven years. On a Jan. 16 conference call with management, one analyst asked whether GE still had faith in its auditor, KPMG, while Jeff Sprague of Vertical Research Partners mused, “It’s hard to imagine a $15 billion problem materialized in the course of the year.”

Ryan Zanin, GE Capital’s chief risk officer, blamed increasing claims from aging policyholders in the past two years.

GE CEO John Flannery said in a statement last week that a charge of this size was “deeply disappointing” at a time when the company was trying to move forward. Flannery has been CEO only since August.

GE declined to comment beyond its previous public comments.

—With assistance from Noah Buhayar.

— Read 5 Notes on GE’s $15B in LTCI Reserve Contributions on ThinkAdvisor.

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