25 January 2018

SEC investigating reserving and controls at General Electric

The US Securities and Exchange Commission (SEC) is looking into the unexpected fourth quarter (Q4) charge and additional insurance reserving that General Electric is having to shoulder for long-term care policies reinsured by its run-off life business North American Life & Health (NALH).

GE's chief financial officer Jamie Miller told analysts in its Q4 earnings call yesterday (24 January) that the SEC had informed the conglomerate of its investigation, which will encompass the process leading up to unexpected reserving and charge, and at General Electric's "revenue recognition and controls for long-term service agreements.

"We are cooperating fully [with the investigation] which is in its very early stages," she said. The SEC did not issue any statement on the news.

GE's chief executive John Flannery said since taking his role last year "the news we have shared specifically around power and insurance has been tough".

He earlier called the $6.2bn after-tax GAAP charge last quarter "deeply disappointing". GE bit the bullet after independent experts including KPMG had reviewed the reserves.

On top of the singular charge – double the earlier guidance from the company - GE Capital is injecting into NALH $15bn of statutory reserves over seven years.

Miller said the reserve adjustment was costing GE $0.71 in earnings per share, and reiterated GE Capital, GE's financial services arm, had enough cash and liquidity to fund the life insurance operation entirely.