GEs Long-Term-Care Insurance Liability Is a Non-Issue in 2020 -- Barrons.com
By Al Root
General Electric CEO Larry Culp made an important insurance disclosure at an investor conference Wednesday. It's good news for the company. The reserve shortfall for the company's legacy long- term-care insurance book of business is far smaller than expected.
General Electric (ticker: GE) shareholders have reason to remember the pain the company's long-term-care insurance business has caused in the recent past. For starters, GE disclosed a $9.5 billion pretax charge in early 2018, reflecting $15 billion in cash the company would add in in future years to its insurance reserves. The size of the charge surprised investors.
Then in August 2019, Harry Markopolos, the forensic accountant credited with uncovering the Bernie Madoff ponzi scheme, published a report alleging that GE management had wrongly accounted for the insurance obligations. GE denied the claim and the stock recovered.
The report, however, did put a spotlight on the company's annual insurance- reserve review. Any insurance company has to test its reserve adequacy from time to time. Required reserves can increase because claims are rising faster than expected, but they can also grow because the investing environment changes. When interest rates are low, insurance companies can need more assets to generate income to pay claims.
Wall Street expected another billion-dollar charge for 2019, a hefty amount but nothing like the one disclosed in early 2018. It turns out the 2019 review, to be released in more detail later this year, requires a much smaller adjustment than investors feared.
"The true-up, the incremental cash that we will need to provide, there's about $100 million," said Culp at a Citigroup investor conference in Miami. "So that is something that we can handle just in the normal course. Obviously, wish it was less. But given the nature of that obligation, we'll take that."
GE no longer sells long-term care insurance, and investors would love to see GE shed its remaining insurance obligations, if it can. Culp said he would be willing to do something if the right opportunity came along. But investors shouldn't assume anything is imminent.
The annual reserve test, done essentially for insurance regulators, is different from those done for accounting purposes. GE took a $1 billion pretax, noncash charge related to long-term-care insurance, against its earnings in the third quarter of 2019 to comply with generally accepted accounting practices, or GAAP. Reserves in terms of GAAP are calculated differently than they are for insurance purposes.
The good news remains that the cash required in 2020 is small. RBC analyst Deane Dray wrote in a Wednesday research report that the $100 million figure was much lower than he anticipated, adding it " suggests that this insurance liability has been mostly ring-fenced by now." Ring-fenced means GE investors, interested in aviation and health care, shouldn't have to fear large insurance-related charges going forward.
Even thought the long-term-care news appears positive, GE stock gave back earlier gains. After trading as high as $12.94 Wednesday, for a gain of 1.5%, the stock closed 1.1% lower at $12.61. The S&P 500 was up 0.5% and the Dow Jones Industrial Average gained 0.4%.
Culp had a busy day. He presented at investment conferences held by both Barclays and Citigroup. At the Barclays conference, the CEO outlined a few cash- flow headwinds the company faces, including the grounded Boeing (BA) 737 MAX jet, as well as the coronavirus outbreak in China. A GE joint venture with France's Safran makes the engines for the jet.