The U.S. Securities and Exchange Commission is officially taking an interest in the accounting for General Electric Co.’s long-term care insurance (LTCI) reinsurance operations.
The SEC sent GE a Wells notice about the company’s insurance accounting practices Sept. 30, GE said Tuesday, in a current report notice filed with the SEC.
- A copy of the GE Wells notice is available here.
- An article about Fitch analysts see LTCI issuers is available here.
Christopher Pereira, GE’s chief corporate counsel, says in the current report notice that the SEC had already been looking into GE’s revenue-recognition practices at units other than the run-off insurance operations at GE’s GE Capital unit.
After GE gave investors an update on the run-off insurance operations, in January 2018, ”the SEC staff expanded the scope of its investigation to encompass the reserve increase and the process leading to the reserve increase,” Pereira writes in the notice.
The SEC later began looking into goodwill accounting at GE’s power business, Pereira says.
“We are providing documents and other information requested by the SEC staff, and we are cooperating with the ongoing investigation,” Pereira says.
The SEC staff said in the new Wells notice that ”it is considering recommending to the SEC that it bring a civil injunctive action against GE for possible violations of the securities laws,” Pereira says. “GE has been informed that the issues the SEC staff may recommend that the SEC pursue relate to the historical premium deficiency testing for GE Capital’s run-off insurance operations, as well as GE’s disclosures relating to such run-off insurance operations. The staff has not made a preliminary decision whether to recommend any action with respect to the other matters under investigation.”
Pereira notes that a Wells notice is not a formal allegation and is not a finding of wrongdoing.
“It allows GE the opportunity to provide its perspective and to address the issues raised by the SEC staff before any decision is made by the SEC on whether to authorize the commencement of an enforcement proceeding,” Pereira says.
“GE disagrees with the SEC staff with respect to this recommendation and will provide a response through the Wells notice process,” Pereira says. “If the SEC were to authorize an action against GE, it could seek an injunction against future violations of provisions of the federal securities laws, the imposition of civil monetary penalties, and other relief within the commission’s authority. The results of the Wells notice and any enforcement action are unknown at this time.”
GE is the Boston-based company started out as the home of the light bulb. It later became a major manufacturer of engines, medical equipment and other high-tech products, and it built large financial services operations.
GE put some of the financial services operations into Genworth Financial. GE converted Genworth into a separate company in 2004, by selling Genworth stock to the public.
GE kept some financial services operations, including LTCI reinsurance operations that were in run-off mode.
A reinsurance company provides insurance for insurers. In some cases, a reinsurer effectively acquires a block of insurance business, by agreeing to assume most or all responsibility for the claims related to the block of business. GE is now paying LTCI claims for people who bought LTCI coverage from many different issuers.
In August 2019, Harry Markopolos accused GE of hiding problems at the LTCI reinsurance business by using unclear accounting. Markopolos is an independent financial analyst who disclosed when he posted his analysis that he could make money if GE’s stock price fell.
GE said Markopolos failed to take the amount of risk GE shares with the original LTCI issuers into account.
The Kansas Department of Insurance, the LTCI operations’ lead regulator, said Markopolos had failed to take some technical reserve considerations into account.
The LTCI Climate
LTCI issuers and LTCI reinsurers have been struggling for years with problems with predicting how many policyholders will keep their policies, how many will use their benefits, and how long claimants’ LTCI benefit periods will last.
Issuers have also suffered from the effects of very low interest rates. Because LTCI policies typically pay off decades after the policies are purchased, insurers had assumed that they could invest the premiums in bonds and collect large amounts of interest.
Instead, bond yields have been low, and LTCI issuers’ interest revenue has been low.
This year, the COVID-19 pandemic has pushed interest rates even lower, and it has raised the possibility that the number of bond default issuer defaults could much higher than usual.
The pandemic may be helping LTCI issuers and reinsurers, by reducing policyholders’ interest in using their benefits to pay for care provided outside the home, and by shortening the lives of some people who are on claim.
— Read GE Responds to Markopolos LTCI Reinsurance Reserving Criticisms, on ThinkAdvisor.