External Stakeholder Requirements
Group Assignment #2: Rating Agency and Investor ERM Analysis
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.
https://www.fitchratings.com/research/non-bank-financial-institutions/fitch-affirms-ge-idrs-at-aa-f1-outlook-revised-to-negative-30-10-2017 (Links to an external site.)
https://www.fitchratings.com/research/structured-finance/fitch-affirms-gsms-2017-gs6-25-03-2021 (Links to an external site.)
https://www.ge.com/sites/default/files/2017-06_GE_SCF_Investor_Report.pdf (Links to an external site.)
https://fm.cnbc.com/applications/cnbc.com/resources/editorialfiles/2019/8/15/2019_08_15_GE_Whistleblower_Report.pdf
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.
www.ftc.gov/news-events/press-releases/2013/07/general-electric-agrees-settlement-ftc-allows-purchase-avios
Your report should address:
- Review General Electric Year-End 2016 and 2017 Financial Presentations (25/100) • Would an investor in early 2017 identify the potential risks from LTC exposure from this presentation? • Now looking at “back mirror”, are there any parts of the Year-End 2016 Financial Presentation raising concerns? • Describe the difference between the 2017 Financial Presentation versus the 2016 Financial Presentation • Describe the actions taken by General Electric to address issues raised by the reserve change in order to rebuild trust with the investor community.
- Insurance Teach-In (25/100) • Why did GE choose to hold the Teach-In? • What actions has the company highlighted to address the issues? • What additional actions should management take? Had management implemented the changes in managing the LTC block earlier, do you think the accounting controversy could have been avoided?
- Credit Rating Agency: (25/100) • How have credit rating agencies reacted to the controversy? What is the latest rating for General Electric’s senior unsecured debt? • What has been the recent A.M. Best ratings history for the two GE insurance subsidiaries, Employers Reassurance Company (ERAC) and Union Fidelity Life Insurance Company (UFLIC)? What are the latest rating outlooks and what can lead to further downgrade? • How would you apply S&P’s Management and Governance Credit Factors to assess General Electric in February 2018? Explain your rationale for the assessment.
- How has GE stock performed compared to the overall U.S. stock market? What are the key risks facing General Electric? (15/100) • Quantify the stock’s performance against the broader market and its sector since December 30, 2016. • Discuss your view of the key risks facing General Electric going forward and why. Would you recommend investing in GE stock? Why or why not?
Similar to Assignment #2, there will be a PowerPoint presentation in class. (10/100)
Grading
Your work will be evaluated based on the quality of the:
- Research and Analysis: You demonstrated a high level understanding of the development of this accounting controversy, the Financial Presentations, the Insurance Teach-in and other relevant public disclosures. You reconciled the different expectations and actions from external stakeholders including credit rating agencies and investors.
- Writing: Your report was prepared as a narrative with logical flow, rather than as a checklist. Your findings were expressed with clear and concise organization, and proper spelling and grammar.
- Class Presentation: Your presentation was well prepared, logical and focused, with clear verbal articulation of major points. You demonstrated time management skills.
Detailed Instructions
- All report submissions must use MLA style and Word document format.
- No limitation on the length of the report.
- Please cite all research references at the end of the document.
- The written report and PowerPoint presentation slides are both due at 6 pm on December 2, 2021. • All group members’ names and the group name should appear in header or footer of each page.
- The presentation should be no longer than 5 minutes and focus on the key topics you would discuss with your client.
APA
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