(CN) – A derivative action brought against General Electric accuses the company of delaying updating the company’s risk assessments of its long term care insurance policies to avoid addressing billions of dollars in potential losses.
Plaintiff Henry Zwang filed suit in the U.S. District Court for the Southern District of New York, claiming that GE had prior knowledge of a financial downturn in the LTC insurance market. Red flags showed industry wide negative trend in the market which were supposedly caused by low interest rates, higher life expectancy and increases in medical costs, according to the complaint.
Other LTC insurers took precautionary measures after they adjusted their assessments to brace for the impact of the market fall where GE did not, Zwang alleges.
GE also allegedly concealed its true exposure from the LTC business and made GE Capital a nonbank “Systemically Important Financial Institution” or a “SIFI” which required increased scrutiny from the Federal Reserve and also included scrutiny of the company’s LTC exposure.
Following the SIFI restructure, “the public was unaware of the massive exposure the LTC policies presented to GE,” according to the complaint. Rather than reporting reserves for the LTC, the company reported them under ‘life insurance benefits’ to obscure the importance of the LTC reserves.
GE Power, a wholly owned subsidiary of GE that builds industrial products including turbines, power plants and generators, was allegedly also underperforming, negatively affecting GE’s ability to sustain dividends and share buyback programs.
“The Company concealed weakness in its GE Power segment by improperly accelerating the recognition of revenue on its long-term service agreements in order to artificially manipulate the company’s quarterly and annual financial results,” according to the 152-page complaint.
In October of 2017, GE announced its third quarter financial results and disclosed that it had “recently observed elevated claims experience,” for GE Capital’s LTC business, which represented $12 billion or roughly half of GE Capital’s insurance reserves, according to the complaint.
Following that announcement, GE stated it would be conducting a comprehensive review of their third quarter assumptions and suspended dividends from GE Capital until the review was completed.
When details emerged concerning GE’s cash flow issues, the company announced it was slashing industrial cash flow from operating activities from approximately $14 billion down to $7 billion. The complaint notes that “the company muted the effects of this partial revelation by assuring investors ‘performance in most of the other segments is strong.’”
Less than a month after GE assured the public that their performance was “strong,” the company cut its annual dividends in half from 96 cents down to 48 cents per share. This marked the first time GE had cut its dividends since the great depression.
The complaint cites analysts who quickly concluded that GE knew about the financial problems with the LTC for some time before informing the public. “It’s hard to imagine a $15 billion problem materialized in the course of a year,” said an analyst with Vertical Research Partners.
“The individual defendants’ actions have devastated GE, as is evident from the 60% stock drop which wiped out over $183 billion of the Company’s market capitalization in a little over a year,” the complaint states. “Moreover, as a direct result of this unlawful course of conduct, the Company is now the subject of an investigation by the SEC.”
Zwang is represented by Thomas G. Amon in New York, Brian J. Robbins of Robbins Arroyo LLP in San Diego and Charles Morrissey of Morrissey & Donahue LLC in Chicago.