A GE Bear Questions the Company's Insurance Disclosures


Al Root

Feb 28, 2019

Since he took the company's top job last year, new CEO Larry Culp has made increased transparency one of his top priorities for General Electric.

     To that end, GE (ticker: GE) greatly expanded insurance disclosures in its 2018 annual report released earlier this week. Sometimes, though, new information can breed new concerns. Wall Street analysts have been pouring over those new disclosures -- and that is causing some fresh fears about GE's assumptions for its insurance business. Some analysts think the company's assumptions are too aggressive.

     The Back Story: GE took a surprise $6.2 billion after-tax charge in January 2018 for losses stemming from its legacy long-term care insurance business.

     Long-term care insurance provides services such as nursing-home care for elderly individuals with chronic health conditions. Bad actuarial assumptions have been a problem for the entire insurance industry, leading to large losses for many insurance underwriters, including GE, which no longer writes new insurance policies.

     What's New: In a research note on Thursday, Gordon Haskett analyst John Inch questioned GE's return and morbidity assumptions related to the company's insurance portfolio.

     In its annual report, GE increased the return assumption on the company's portfolio of assets supporting its insurance liabilities to 6.04% from 5.67%. Higher return assumptions means less assets are required to meet the liabilities. Without knowing how the portfolio is constructed, its difficult to know if GE is being aggressive or not.

     Changes at GE Capital could account for the change. Anthony Grandolfo was named chief investment officer of GE Capital North American Life and Health in October. His appointment means that the type and duration of assets in GE's portfolio could have changed.

     GE also increased its morbidity assumption. That's like saying people are getting healthier so they won't require as much long-term care. Bank of America analyst Andrew Obin also thinks the morbidity assumption is a risk. GE disclosed that if the company were to assume no improvement, then GE would need to increase insurance reserves by $3.7 billion. That means more cash required for insurance in the future and another -- albeit smaller -- charge like the one GE took last January.

     Looking Ahead: However, just like the asset-return assumption, it's difficult to know whether the morbidity improvement is justified. Fortunately, investors will have the chance to resolve these issues on March 7 when GE hosts an insurance "teach-in."

     After that event, GE will have an "outlook" meeting a week later, on March 14. So, like Culp planned, investors won't lack for new business details under his tenure.

     When asked about its insurance assumptions, GE's head of investor relations Steve Winoker said that simplifying and improving the transparency of reporting has been a focus for management. They added that more detail about the insurance business is forthcoming at the teach-in.

     That's good news, but Inch's observations still highlight the fact that GE is a complicated situation with many moving parts. In the future, GE investors will probably be thankful when there are no more insurance disclosures to try to understand.