GE to Take $6.2 Billion Charge Tied to Finance Unit’s Insurance Reserves

Posted January 16, 2018 1:58 p.m. EST
Updated January 16, 2018 2:00 p.m. EST

General Electric delivered another disappointing surprise to investors on Tuesday, taking a $6.2 billion charge to pay for lingering problems in its finance unit.

The announcement was a setback for a turnaround campaign being led by John Flannery, who took over as GE’s chief executive in August and quickly discovered that the woes of the company’s big power-generation business were far worse than had been previously known.

In a conference call with analysts, Flannery emphasized that his main focus was bolstering the strength and performance of GE’s three main businesses: power generation, aviation and health care. He has previously said the company would sell at least $20 billion in assets over the next two years, with lighting and railway-locomotive businesses going on the block.

Beyond that, Flannery reiterated his commitment that “all options are on the table” and that there were “no sacred cows.” He did not specifically mention the possibility of a wholesale breakup of the company, as some investors and analysts have urged.

As for the $6.2 billion fourth-quarter write-off, GE said it was making the move after conducting a review of the insurance portfolio that is part of GE Capital, the finance arm.

Under Flannery’s predecessor, Jeffrey R. Immelt, the industrial giant drastically cut back GE Capital after the financial crisis began in 2008. The unit has now largely been pared back to its original purpose: financing for GE customers to buy the company’s jet engines, power turbines, medical-imaging machines and other industrial equipment.

Only a few nonindustrial finance businesses remain within GE Capital. The newly disclosed trouble surfaced in one of those, a reinsurance unit, North American Life and Health, mainly because of the higher-than-expected cost of reinsuring long-term care policies sold by other insurers.

After examining the trend in claims tied to such policies, GE, working with the reinsurer’s primary regulator, the Kansas Insurance Department, decided it needed to substantially increase its reserves for future payouts. Many of the policyholders are now 80 and older, an age when claims rise substantially.

GE has agreed to add $15 billion to reserves for the business over the next seven years.

“This is deeply disappointing,” Flannery said in the conference call. He added that the anticipated costs were manageable, would be “contained within GE Capital” and would have no effect on investment in the company’s industrial businesses.

Still, GE said, GE Capital would suspend dividend payments to the parent company for the “foreseeable future.” To conserve cash, Flannery cut GE’s dividend last year, only the second time since the Depression that had happened.

Flannery did say on Tuesday that GE would explore different potential ownership structures for the remaining units, as it did with its oil-field equipment business last year. In July, the company completed a merger of its oil and gas division with Baker Hughes into a separate company in which GE holds a 62.5 percent stake.

“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,” Flannery said.

The scope of the insurance problem, and its seemingly sudden emergence, was reflected in sharp questions from analysts about the performance of GE’s outside auditor, KPMG, and possible lapses by GE managers.

GE said it had used two outside auditors to assess the insurance obligations, and Jamie Miller, the company’s chief financial officer, said that the GE board reviewed the selection of the company’s auditor every year.

The company’s scrutiny of its finance unit and other businesses is continuing. “We’ve been scrubbing deeply,” Flannery said.

The circumstances surrounding the insurance problem echoed those that cropped up in the company’s power-generation business last year. Problems in long-term care insurance are not startling, as the population ages and claims pile up. Similarly, a slowdown in demand for gas turbines was could be expected, with energy efficiency improving and utilities steadily switching to renewable sources of electricity.

In both cases, it was the magnitude and suddenness of the problems that unsettled investors and, apparently, Flannery himself. Questioned by analysts, he said, “I share your surprise and disappointment of this coming out of a legacy business.”

The problems at GE were brewing well before Flannery took over, and analysts said he had moved swiftly to take corrective action. But the two announcements of deeper-than-anticipated troubles, they said, added to the uncertainty surrounding the company.

“The good news is that Flannery seems to have cleared the deck,” said Scott Davis, an analyst at Melius Research, an independent financial analysis firm. “The bad news is, how do you trust anything now?”