GE Capital's $6.2 bn insurance losses force a revival of breakup plans
17 Jan 2018
American multinational General Electric Co is planning to undertake a more comprehensive restructuring, a decade after the conglomerate hived off substantial businesses in a bid to concentrate on its main business and stay trim.
CEO John Flannery, who was put in charge of reviving the company last summer, on Tuesday revealed significant issues with GE Capital's insurance portfolio that will lead to a $6.2-billion after-tax charge in the fourth quarter.
GE on Tuesday announced that the comprehensive review and reserve testing for GE Capital's run-off insurance portfolio, North American Life & Health (NALH), will result in an after-tax charge of $6.2 billion for the fourth quarter of 2017, and GE Capital expects to make statutory reserve contributions of ~$15 billion over seven years.
GE Capital, the company's finance division, will also suspend its dividend to the parent company for the foreseeable future.
The Kansas Insurance Department, NALH's primary regulator, approved a phased contribution of ~$3 billion in 1Q'18 and ~$2 billion annually from 2019 through 2024.
''As we disclosed during the company's second- and third-quarter earnings calls and further discussed during our November 13, 2017, investor presentation, earlier this year GE Capital initiated a comprehensive review of our insurance reserves with the assistance of leading outside experts,'' said John Flannery, chairman and CEO of GE. ''This was a rigorous process involving complex factors and estimates relating primarily to long-term care policies written by primary insurance companies and reinsured by NALH.''
''The required contributions to the statutory reserve will be made by GE Capital, which has sufficient liquidity to do so. We have been taking ongoing actions to make GE Capital smaller and more focused while maintaining its key capabilities to support financing for GE Industrial products. These actions will also help restore GE Capital ratios to appropriate levels. At a time when we are moving forward as a company, a charge of this magnitude from a legacy insurance portfolio in run-off for more than a decade is deeply disappointing,'' Flannery added.
The required statutory contributions will be a higher number than the GAAP charge, due primarily to modifications of certain assumptions to reflect various potential adverse conditions, as is required for statutory accounting purposes.
"We are looking aggressively at the best structure or structures for our portfolio to maximize the potential of our businesses," Flannery said during a conference call.
The comments are stronger than what GE has said in the past. The company continues to review its vast and complex portfolio.
The news comes after GE (GE) surprised investors on Tuesday by disclosing a larger-than-feared $6.2 billion hit from insurance problems at GE Capital, the financial arm that the company has mostly sold off. GE further warned it will have to devote $15 billion to boost insurance reserves at GE Capital.
The new CEO said the review could result in many different outcomes, including "separately traded assets really in any one of our units if that's what made sense." A decision could be made by the spring.
After years of resisting, GE is likely to embrace a major breakup of the company, CNBC reported on Tuesday quoting sources.
Over the past decade, GE has already sold off NBC Universal and most of GE Capital. GE, however, continued to suffer from a serious cash crunch caused by years of questionable decisions and complex and murky accounting procedures. GE was even forced to cut its dividend last year for the second time since the Great Depression.
GE has not spelt out clearly which businesses will be axed. It is also not clear how the post-restructuring GE will look like. However, GE has signalled a focus around three key business areas: power, aviation and healthcare.
GE is already trying to sell off its iconic lightbulb division and the century-old rail business. GE is even thinking about ditching its majority stake in Baker Hughes (BHGE), which it merged its oil and gas business with in 2016.
Flannery has spoken about the need to "simplify" GE's portfolio, creating a more nimble company that's easier to operate and better at executing. One of GE's biggest problems is its fossil fuels-focused power division, which was caught badly off guard by the dramatic rise of renewable energy.
