By Theo Francis and Ted Mann
Federal securities regulators have warned General Electric Co.
of a civil-enforcement action over its accounting for a legacy
insurance business, adding a fresh hurdle to efforts to turn around
the once-mighty manufacturer.
The industrial giant said in a securities filing Tuesday that it
received the so-called Wells notice on Sept. 30 over the company's
accounting for reserves related to an insurance business it has
been trying to wind down for years.
A Wells notice is a letter saying the SEC staff is recommending
that the commission bring an enforcement action against the
recipient and offers an opportunity to argue why the action
shouldn't be taken. It often serves to cap investigations that can
drag on for years, as the final step before formal litigation
begins.
The SEC and the Justice Department have been investigating GE's
accounting for about two years after the company disclosed large
write-downs tied to the insurance business and its power
business.
In a statement, GE said it has cooperated with the SEC and
strongly disagrees with the staff's recommendation that the
commission sue. The company said it would respond through the Wells
notice process.
The company also made some executive changes on Tuesday,
including the retirement of the head of the GE Capital unit, which
houses the insurance business. GE for years has been shrinking GE
Capital, once a sprawling lending operation that rivaled the
biggest U.S. banks, but nearly sank the company during the 2008
financial crisis.
Accounting problems surfaced in late 2017 as GE was struggling
with declining profits and cash flow following the departure of
former CEO Jeff Immelt. The company later disclosed, in January
2018, that it needed to bolster its insurance reserves by $15
billion and booked a $6 billion charge. In early 2018, GE said it
was also the subject of a criminal probe by the Justice
Department.
Many investors were surprised by the insurance situation, partly
because GE executives had repeatedly declared the company had shed
its insurance risk. GE spun off most of its insurance holdings into
Genworth Financial Inc. in 2004 and sold much of the rest to Swiss
Reinsurance Co. two years later.
But GE kept the risk for a bloc of long-term-care insurance
policies, written by GE Capital until 2006. Such policies pay for
nursing homes and assisted-living facilities. They have proved to
be an expensive problem for the insurance industry, which
underestimated how much the policies would need to pay out.
GE removed the long-term-care liabilities from its annual report
for 2012 and didn't put them back until 2018. That's when GE
reported insurance liabilities of $38 billion, up from $11.1
billion the previous year.
Former GE employees said the insurance business failed to
internally acknowledge worsening results over the years, the
Journal has reported. These employees described what they called
lax managerial oversight and buried risks that kept the company
from booking bigger reserves. One former GE Capital employee said
it was clear at the time of the 2004 Genworth IPO that a bloc of
long-term-care policies were toxic.
Former GE executives said the company conducted regular reviews
of its insurance liabilities, and accelerated a deeper review of
the insurance book after noting worrisome trends during 2017. Those
executives say GE acted quickly and responsibly to shore up the
reserves after the liabilities unexpectedly surged.
A shareholder lawsuit brought in 2017 by pension funds alleged
the insurance accounting fueled a yearslong fraud that inflated
GE's results. GE has sought to dismiss the suit, saying in court
filings that management mistakes, not fraud, were to blame for the
company's problems.
The insurance problem is a hangover from GE's one-time reliance
on financial services to drive its profits. At its height, GE
Capital accounted for more than half of GE's profits, driving some
who followed the company to criticize the unit as a black box that
primarily served to paper over uneven performances in its
industrial units.
GE says it has brought on new leaders to run the insurance
portfolio from outside the company and reviewed its accounting
practices. In 2019, GE insurance executives said they were pushing
to raise premiums and boost investment returns on reserves.
In recent months, CEO Larry Culp has said the coronavirus has
eased some pressure on the long-term care claims, since some people
have been reluctant to enter nursing homes. The lethality of the
pandemic has driven up claims in GE's life insurance assets, he
said in July.
In addition to the company's insurance accounting, the SEC is
investigating revenue recognition practices in GE's power business
and a $22 billion charge the company booked in 2018 tied to
acquisitions in GE's power unit, the company has said.
The SEC staff hasn't made a decision whether to recommend any
action on those matters, GE said in its Tuesday afternoon
filing.
GE's stock has tumbled, and the company has slashed its dividend
to a token penny per share. It also has sold off various business
units, cut jobs and switched leaders, installing Mr. Culp as CEO in
October 2018. GE also decided to change auditors after more than a
century with KPMG, hiring Deloitte starting next year.
GE shares slipped nearly 4% to $6.17 in Tuesday trading. The
company, once the most valuable in the U.S., was removed from the
Dow Jones Industrial Average earlier this year.
As part of Tuesday's executive shuffle, GE said the new head of
GE Capital would report to the company's finance chief while the
head of the company's plane-leasing unit, Gecas, would now report
directly to Mr. Culp.
Write to Theo Francis at theo.francis@wsj.com and Ted Mann at
ted.mann@wsj.com
(END) Dow Jones Newswires
October 06, 2020 16:58 ET (20:58 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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