General Electric Company

Has a “Failure to Pay” Credit Event Occurred at General Electric Company?
Has a Failure to Pay (Section 4.5 of the 2014 ISDA Credit Derivatives Definitions) occurred on General Electric Company (GE) as the Reference Entity with respect to GE’s payment obligation when and where due pursuant to Capital Maintenance Agreements (CMAs) with its long-term care insurance subsidiaries? The question relates to the Obligation Category of Payment and is raised due to the following considerations:
1.       The potential Failure to Pay may create an Event of Default on existing derivative contract master agreements as referenced in GE’s September 2018 10-Q (page 100)
2.       GE’s Failure to Pay may adversely impact or otherwise compromise Borrowed Money. For example, Funding Agreement / Guaranteed Insurance Contract (FA/GIC) obligations backed by Massachusetts Mutual Life (such as CUSIP 57629WCE8) derive over 10% of their regulatory capital from the benefit of reinsurance provided by GE’s long-term care subsidiaries.
3.       The involvement of a Governmental Authority may warrant including Governmental Intervention as a Credit Event in ISDA’s Standard North American Corporate (SNAC) Physical Settlement Matrix (Matrix).
 Reference Entity
Reference Entity General Electric Company (GE) is a non-bank and non-SIFI holding company domiciled in New York. GE’s wholly-owned insurance subsidiaries, Employers Reassurance Corporation (ERAC) and Union Fidelity Life Insurance Company (UFLIC), are domiciled in Kansas and subject to regulation by the Kansas Insurance Department (Governmental Authority). GE had $115 billion in total debt outstanding as of September 30, 2018 and has obligations arising from its ownership and ongoing support of ERAC and UFLIC.
Credit Event
On November 7, 2018, ERAC provided further disclosure that it required a “permitted practice” to “spread and delay” long-term care reserve increases without which it “would have required an additional capital contribution from its parent (GE) under the terms of the existing Capital Maintenance Agreement in place.” (ERAC Quarterly Statement – Note 1, Page Q7). Pursuant to the only publicly-available CMA from 2004, GE “shall restore” capital “within 65-days” which has not occurred based on publicly-available information. GE’s CFO stated “we will not use GE parent cash to fund this” in reference to the CMA despite reinsurance beneficiary Genworth Financial’s 2017 10-K stating “GE is successor obligor” under CMA. GE disclosed in its September, 2018 10-Q that it “expects to contribute approximately an additional $11 billion through 2024 subject to ongoing monitoring by the Kansas Insurance Department” which is at odds with the 65-day requirement and is the basis for the query as to whether a “Failure to Pay” (Section 4.5) Credit Event has occurred. The 7-year payment window also extends beyond any logical or explicit Grace Period provided for in the publicly-available CMA and represents an ongoing Failure to Pay in respect of each date on which in the absence of the permitted practice the CMAs would have required a capital contribution by GE.
GE’s Payment Obligation under CMA
GE has obligations under CMAs with its primary insurance companies ERAC and UFLIC. The CMA with UFLIC, publicly available via a 2004 8-K, whereby GE (and its predecessors) “shall restore” the “capital level” “within 65 days of the end of such calendar quarter” (Section 1 of CMA) is “an absolute, unconditional, present and continuing obligation” (Section 2). The obligation is not subordinated and “GE is the successor obligor” according to reinsurance beneficiary Genworth’s annual report (page 82 Genworth 2017 10-K). The ERAC CMA is not publicly-available.
Failure to Pay
GE was and is obligated to inject $11 billion into its insurance subsidiaries according to GE’s September 2018 10-Q (page 89). GE’s CFO has unambiguously stated that “We will not use GE parent cash to fund this” in reference to the CMA obligations during a January 2018 investor conference call (January 16, 2018).  ERAC sought regulatory forbearance from a Governmental Authority early in 2018 (Kansas Insurance Department) via a “permitted practice” which would “spread and delay” the full recognition of the charge (ERAC Quarterly Statement September 2018 – Note 1, Page Q7). ERAC states on November 7, 2018 it “would have required an additional capital contribution from its parent” (GE) “without the permitted practice.” (ERAC Quarterly Statement September 30, 2018 – Note 1, Page Q7). The publicly-available CMA does not allow for state (Kansas) permitted practices and only points to national (NAIC) standards. The permitted practice was publicly announced via ERAC’s annual report on February 26, 2018 and is ongoing as of the November 7, 2018 filing. The NAIC specifically states that permitted practices “depart from NAIC SAP and state prescribed accounting practices” and GE has therefore not fulfilled its obligation pursuant to the CMA. The ERAC CMA is not publicly available but the UFLIC CMA is available and one can reasonably assume the documents are substantially similar as GE refers to both documents interchangeably (10-K states “GE is required to maintain specified capital levels at these insurance subsidiaries under capital maintenance agreements”). The Capital Threshold for the ERAC CMA is 300% and 150% for the UFLIC CMA and ERAC’s Capital Threshold has only been restored via permitted practice but not to “risk based capital requirements as defined from time to time by the National Association of Insurance Commissioners” pursuant to Section 1 of the publicly-available CMA.
 Failure to Make “Payment Requirement” … “When and Where Due”
The action via “permitted practice” to “spread and delay” the financial impact resulted in a non-payment of GE’s CMA obligations when and where due (within 65-days) whereby GE’s 10-Q says it “expects to contribute approximately an additional $11 billion through 2024 subject to ongoing monitoring by the Kansas Insurance Department” (GE 10-Q September 2018 page 88). The 7-year payment postponement subject to regulatory supervision does not comply with the 65-day obligation stated in the publicly-available CMA.
Governmental Intervention (GI)
Governmental Intervention (GI) Credit Events (Section 4.8) include (pursuant to Section (a)(i)(3)) “a postponement or other deferral of a date or dates for … (II) the payment of principal or premium” by an “action taken” by a “Governmental Authority .. by means of … resolution law or regulation” (Page 43 – 2014 ISDA Credit Derivatives Definitions). GI Credit Events are not included in ISDA’s current SNAC Physical Settlement Matrix but the fact pattern in the case of GE and its long-term insurance subsidiaries should raise the prospect of including GI as a Credit Event under ISDA’s SNAC Physical Settlement Matrix.
 
General Interest Question
Does the failure of GE to “make, when and where due, any payments” arising from the CMA constitute a “Failure to Pay” (Section 4.5) Credit Event pursuant to the 2014 ISDA Credit Derivative Definitions? While the CMA obligation is not Borrowed Money, the question is raised given the potential impact on other market participants in derivative or insurance markets or Borrowed Money (such as FA/GIC obligations) as well as whether Governmental Intervention should be included as a Credit Event on ISDA’s SNAC Physical Settlement Matrix.
 
Supporting Documents
Attached  

 
 

General Electric Company 10-K (12/31/2017)
General Electric Company 10-Q (9/30/2018)
Capital Maintenance Agreement
Genworth Financial 10-K (12/31/2017)
Employers Reassurance Corporation (Annual Statement 12/31/2017 and Quarterly Statement 9/30/2018)
NAIC Statutory Accounting Principles (SAP)
GE Insurance Update Conference Call (January 16, 2018)
Massachusetts Mutual Life Insurance Company 2017 Annual Report