General Electric: SEC Wells Notice Sounds Foreboding – Citybizlist

8October 2020

Summary

  • GE received a Wells Notice from the SEC pursuant to GE’s historical premium deficiency testing for GECC’s run-off insurance operations.
  • GE’s operations are reeling from a dismal global economy. The last thing it needs is for the market to question its accounting policies.
  • The Wells Notice could raise questions regarding GE’s reserves or trigger a reserve increase.

Sell GE.

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GE CEO Larry Culp. Source: BarronGE CEO Larry Culp. Source: Barron’s

Tuesday General Electric’s (GE) stock fell in the low-single-digit percentage range on news it received a Wells Notice from the SEC:

The SEC has been conducting an investigation of GE’s revenue recognition and internal controls over financial reporting tied to long-term service agreements. It had expanded the scope of that investigation in 2018 after disclosures tied to GE Capital and GE’s Power businesses.

The notice advises GE that the SEC staff is considering recommending a civil injunctive action for possible violation of securities laws.

“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,” according to GE’s 8-K filing.

In 2018 GE announced an after-tax charge of more than $6 billion related to its legacy insurance portfolio. After reviewing its reserve testing the company decided to make statutory reserve contributions of about $15 billion over seven years. The lion’s share of the reserve increases were related to GE Capital’s (“GECC”) North American Life & Health (“NALH”). NALH was in run-off status and had previously written long-term care (“LTC”) business.

LTC wrote business for and pays claims for nursing homes, assisted living and home health. The unit’s investment portfolio was likely hampered by low interest rates after the Financial Crisis. Lower investment returns, combined with potentially higher than expected claims, may have been a perfect storm for LTC.

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Source: newyork.citybizlist.com

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