GE Contemplates Dismantling Major Division
By Thomas Gryta
January 16, 2018 - General Electric Co.'s chief executive said the company is considering breaking apart the American icon after it disclosed more problems buried in one of its major units.
John Flannery, who took over as CEO last summer, said the Boston conglomerate is re-evaluating its strategy and structure, including splitting its major divisions into separately traded units.
"We are looking aggressively at the best structure or structures for our portfolio to maximize the potential of our businesses," Mr. Flannery said on a conference call Tuesday, promising to update investors in the Spring. "Our results, over the past several years, including 2017 and the insurance charge, only further my belief that we need to continue to move with purpose to reshape GE."
GE spent decades striking deals that once made it the most valuable U.S. company, with a financial-services arm that rivaled the biggest banks and a media empire that included NBC. But since the financial crisis the company has shrunk its operations to focus on its core industrial divisions. It also made big bets on oil and coal markets that have depressed its recent results.
A breakup would come just a few months after Mr. Flannery unveiled his plan to turnaround the struggling giant by focusing on its three core units -- aviation, power and health care. In November, Mr. Flannery slashed the dividend by half and said he would divest $20 billion of assets, though he stopped short of the more dramatic structural changes he raised on Tuesday.
GE has been struggling to increase its profits and is under pressure from investors, including activist Trian Fund Management, to cut costs and revamp its operations. Last year, executives blamed overcapacity in its big power business for a shortfall in profits and cash flow. In December, GE said it would cut 12,000 jobs in the unit, which makes turbines used in power plants around the world.
On Tuesday, GE said it would book a $6.2 billion charge in its fourth quarter and would have to set aside $15 billion over seven years to bolster insurance reserves at its GE Capital unit, surprising investors with deeper-than-expected problems in a business many thought the company had left behind.
The charge follows a reassessment of the conglomerate's remaining insurance business. Although GE sold much of its financial-services operations after the 2008 financial crisis, it kept on its books billions of dollars of coverage for long-term-care policies that had been sold by other insurers to consumers. Those policies promise to pay for nursing homes and other care for individuals.
Although GE hasn't covered new policies since 2006, it and other insurers have begun to reckon with what are emerging as deep shortfalls. Over the past several years, many insurers have sought regulatory approval from state insurance departments to increase rates, with partial success, saying they aren't collecting enough in premiums to offset the claims as those individuals age.
GE discovered last year that its reinsurance coverage was operating at a deficit, prompting the company to review all of its assumptions, according to a person familiar with the matter.
The upshot is that the GE Capital unit, which had been paying dividends in recent years to the parent company, won't pay dividends to GE for the foreseeable future. GE had suspended the GE Capital dividend last year and slashed its payout to shareholders by half.
Mr. Flannery has been working to streamline the once far-reaching GE Capital unit and focus it on providing financing for GE's industrial operations, such as jet engines and MRI machines. He expressed frustration at the review's results while saying the actions would 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," he said.
GE shares slid 3% in early trading Tuesday, to just above $18. Wall Street was braced for the charge, which GE had said would exceed $3 billion. The company is slated to report its fourth-quarter financial results next week.
GE's looming charge is one of the biggest yet in a corner of the insurance industry that has reeled from pricing miscalculations made decades ago. About 7.3 million of the policies are in consumers' hands, some with generous lifetime benefits.
Insurers have taken $10.5 billion in pretax charges against their earnings in recent years to boost reserves for future claims, according to analysts at investment bank Evercore ISI.
Genworth Financial Inc., which was spun off from GE in 2004, has tallied losses from its older long-term-care policies of $2.5 billion since 2006.
Long-term-care insurance took off in the early 1990s. The policies had strong appeal to older people, and many insurers thought they had the perfect product to profit from people's concerns about becoming unable to care for themselves and outliving their savings.
In general, the policies pay for nursing homes, assisted-living facilities or health-care aides in people's private residences. Such care generally isn't paid by the Medicare health-insurance program for older people, while the federal-state Medicaid program is for the poor.
But by the mid 2000s, many insurers were rapidly ratcheting back the benefits, concluding they had badly miscalculated how many people would file claims and how long they would draw benefits before dying, among other things.