Analyst: Regulatory Response To GE Allegations Is Reassuring For Investors

General Electric Co (NYSE: GE) stock initially took a big hit last week following accusations of rampant fraud by former Bernie Madoff whistleblower Harry Markopolos, but one analyst says the allegations seem a bit underwhelming upon closer inspection.

The Analyst

Bank of America analyst Andrew Obin reiterated his Neutral rating and $11 price target for GE.

The Thesis

Obin said the initial negative knee-jerk reaction in GE's stock to the accusations highlight just how skittish investors have become after years of negative headlines. Obin said the Kansas Insurance Department, which regulates GE’s long-term care insurance subsidiaries, issued a statement on the claims that should be very reassuring for investors. The Department referred to the allegations against GE as “fairly simplistic in nature” and said they “don’t appear to incorporate certain technical reserve considerations.”

Obin said the regulatory response is telling, and it’s extremely difficult to compare GE’s LTC insurance business to other insurers in the manner Markopolos does in his report.

“The report picks very specific blocks of policies, claiming these to be most comparable (i.e., a block of 21K from 207K Prudential policies, a block of 17K from 905K Unum policies). However, the diversity of contract terms makes apples-to-apples comparisons difficult,” Obin wrote in a note.

For example, Obin said about 99% of GE’s LTC policies lack a cash benefit option, which lowers their reserve requirements.

GE already plans to devote about $2 billion annually toward insurance reserves between now and 2024, and Obin values GE Capital at negative $10 billion. However, even with GE Capital weighing down overall valuation and the stock trading at an enterprise multiple discount to its peer group, Bank of America still estimates the stock has more than 25% upside from its current level.

Price Action

GE's stock traded lower by 2.6% to $8.44 per share Tuesday morning.

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