General Electric Long-Term Care Reserve Strengthening Controversy
Overview
General Electric (GE) is an American multinational conglomerate incorporated in New York City and headquartered in Boston. The company operates through the following segments: aviation, healthcare, power, renewable energy, digital industry, additive manufacturing, venture capital and finance and lighting. In 2018, GE ranked among the Fortune 500 as the 18th-largest firm in the U.S. by gross revenue. For over a century, General Electric has been a high profile bastion of American industry and opportunism. Originally the vision of inventor Thomas Edison and incorporated in 1889, GE was one of the original 12 public companies listed on the New York Stock Exchange in 1896. Over the years, GE has expanded its reach into areas well beyond its core power and lighting businesses, including media and financial services. For many years the company was highly renowned for its financial strength and operational discipline, as indicated by its high credit ratings and six sigma certification program. Former CEO Jack Welch was a mainstream iconic figure in American media, leading GE to unprecedented heights during his tenure from 1981 to 2001.
The company's status reputation has gradually eroded in recent years as it has struggled to realign its portfolio of businesses with its strategic mission, selling off several non-performing assets. In late 2005, GE publicly announced it had completed its exit of the insurance industry. However, GE Capital still owns a pair of reinsurance entities with business assumed from primary insurers that was in run-off mode (i.e. no new policies were being reinsured). Much of the business reinsured are long-term care (LTC) policies, which provide financial protection to insureds for custodial care required from nursing home and other providers due to the inability to engage in two or more activities of daily living.
Projecting the future cost of LTC policies is an exceedingly challenging endeavor, as projected benefits may not be paid for twenty or more years after policy issue. This requires actuaries to set and continually monitor a plethora of assumptions underlying the policies, including future claim frequencies, length of claim, and cost of care.
During 2017, GE announced that it was undergoing a detailed review of the reserves set aside for LTC. As part of GE’s 4Q17 earnings disclosure, the company announced that as a result of this review, the company would take a $6.2 billion after-tax charge to 4Q16 earnings. In addition, the company committed to funding statutory required reserves by an aggregate $15 billion from 2018 to 2023, receiving a permitted statutory accounting practice for this installment schedule.
GE’s stock price dropped precipitously during 2017 and 2018, from $31.60 on December 30, 2016, to $17.45 on December 29, 2017 and $7.51 on December 28, 2018. The stock dropped out of favor among many equity analysts, and a shareholder lawsuit has been filed against the company, citing that the company purposely and chronically under-reserved its LTC policies despite emerging experience, as well as using fraudulent accounting to prop up its power business.
Assignment
You are a high profile enterprise risk management (ERM) consultant. You have been retained by a long-term institutional investor to analyze the developments of the GE accounting controversy.
You were asked to review GE’s 2016 and 2017 year-end financial presentations, supplemented by quarterly earnings, rating agency reports and equity analyst reports. You were asked to prepare a report to help the investor understand the development of the accounting controversy, what role ERM has played in managing the situation, actions taken by the different management teams to address the issues, and the key risks outstanding for investing in General Electric.
Please see below the supporting websites for Assignment #2.
knowledge.wharton.upenn.edu/article/what-does-the-future-hold-for-ge/
money.cnn.com/2017/11/20/investing/general-electric-immelt-what-went-wrong/index.html
www.ge.com/in/water/chemical-processing.
www.un.org/sustainabledevelopment/energy/.
www.gemeasurement.com/environmental-health-safety-ehs.
www.gegridsolutions.com/geospatial/catalog/smallworld_serviceFFA.htm.
Your report should address:
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