Delusion, Fraud And The Role Of The SEC - The General Electric Long-term Care Case

Luckin Coffee (LK) just settled with the SEC for a fine which I guess will be paid by shareholders. Given that the whole thing is a massive admitted fraud being paid by "shareholders" is a pretty moot case. There is not much evidence that the shareholders have anything left. Other than any part of the fine that might be distributed to them I doubt the shareholders ever get a penny.

Whatever: this prompted a twitter debate about the fine paid by General Electric (GE) after their long-term-care debacle.

This tweet by Francine McKenna is where it started.

I disagree sharply. 

First let's explain what that $24 billion cost at GE was.

a). GE wrote a lot of business in now sold/closed insurers insuring against the need for people to go into nursing homes. It would pay for the nursing home if that unfortunate situation actually arose. This insurance is called "long-term care insurance".

b). Long-term care insurance has been a near universal disaster for the insurance industry. Almost everyone who touched it lost money. The reason is that people lived longer than expected, they lived more of those years in nursing homes than people expected and the cost of nursing homes went up more than expected. Insurers did not deliberately lose money in long-term care - but everyone lost money in the end. That is the nature of insurance - it is full of surprises - and the surprises are mostly negative.

c). GE had a keepwell agreement with (State) Insurance Commissioners that required that they keep the long-term care subsidiaries capitalised at 300 percent of statutory minimums. This meant that negative surprises at the subsidiaries caused a cash call on the parent company of 3x the negative surprise. 

d). The long term care companies were under-reserved by $8 billion - a mistake that was common in the industry - but in this case a pretty nasty mistake.

e). Because of the keepwell agreement the cost to the GE Parent company was $24 billion. If the book of business runs off as GE currently expects much of that $24 billion - will be returned over time. After all the bulk of it is agreed "excess" capital.

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