By Alwyn Scott and Ankit Ajmera
(Reuters) – General Electric Co again raised the prospect of breaking up the conglomerate on Tuesday as it announced more than $11 billion in charges from its long-term care insurance portfolio and new U.S. tax laws.
Chief Executive John Flannery has previously raised the idea of selling pieces of the largest U.S. industrial company, as he slashes thousands of jobs and moves to cut $3.5 billion in costs to counter a plunge in profits and cash flow.
Flannery inherited a host of problems when he became CEO on Aug. 1, such as falling sales of power turbines, a build-up of inventory and declining profit margins in some businesses.
His statements on Tuesday showed that the idea of a break-up remains part of GE’s thinking, though not a certainty.
“I would categorize it as an examination of options and it’s (the) kind of thing that could result in many, many different permutations, including separately traded assets really in any one of our units, if that’s what made sense,” he said in response to an analyst question on a conference call, without giving any details.
GE said it will provide another update on its review in the spring. A decision could come then, CNBC reported, citing sources close to GE, adding that a break-up was “likely.”
Earlier on Tuesday, GE said its finance arm, GE Capital, would take a $7.5 billion after-tax charge in the fourth quarter from a reevaluation of its insurance assets. It will also take a $1.8 billion charge for non-cash impairments at GE Capital.
“We’ve seen this movie before” with GE, said Deane Dray, an analyst at RBC Capital Markets. “They say they’re adequately reserved until they’re not. And then you see a parade of incremental reserve charges.”
GE shares were down 3.9 percent at $18.03 in afternoon trading. At that level, the company has a market capitalization of about $156 billion.
The insurance charge is the latest sign of problems with the modeling and funding of nursing home and other long-term care in the United States.
GE said it reviewed policy assumptions with actuaries and accountants after seeing that payouts had begun to exceed premiums on a portfolio of about 300,000 policies that stem from businesses GE acquired in the 1980s and 1990s. GE sold most of those business last decade and has not written such policies since 2006.
The review, concluded a week ago, showed GE needed to set aside $15 billion through 2024, including $3 billion in the current quarter, to cover potential payouts on the policies it retained.
“Clearly, in hindsight, we under-appreciated the risk,” Flannery said.
GE Capital last year temporarily suspended paying dividends to GE. Now, GE Capital will suspend its dividend for the “foreseeable future” to help fund the reserve, GE said.
The problem was flagged in July when GE said “adverse claims” were appearing in part of its long-term care portfolio and it was assessing how much policy-holders would likely pay.
TAX CHANGE CHARGE
Tax changes recently passed by the U.S. Congress raised GE’s fourth-quarter charge to $7.5 billion, more than twice an initial indication of more than $3 billion that GE had noted in November. GE also will record a $3.4-billion impact from tax reform and $1.8 billion in goodwill and other non-cash impairments, all in the fourth quarter.
The charges means GE’s 2017 profit will be at the bottom end of its forecast, GE said.
Flannery said in November that GE would pare its operations to three main businesses – power, healthcare and aviation – and seek to dispose of $20 billion in operations. He also said further major portfolio changes were being considered. Asked how his strategy had evolved since November, Flannery said:
“We’ve been taking a comprehensive look at every aspect of the company and that everything was on the table. So that’s been, I’d say, a hallmark of our approach from day one.”
GE said the Kansas Insurance Department – the primary regulator for North American Life & Health, GE Capital’s insurance portfolio – had approved the phased $15 billion reserve payments through 2024.
The set-aside highlights long-running difficulties for long-term care insurers and re-insurers who are struggling to make good on policies dating back decades that underestimated projected health-care costs and life spans.
The cost of nursing home or home-based elderly care tends not to be covered by Medicare, the U.S. government insurance program, and can be extremely expensive out of pocket.
GE was the worst performer on the Dow in 2017 and it has already cut its planned annual dividend for 2018 in half, only the third cut in the company’s 125-year history.
Even after the stock’s declines, it trades at only a slight discount to industrial peers, trading at about 18 times this year’s expected earnings.
(Reporting by Ankit Ajmera in Bengaluru; Editing by Saumyadeb Chakrabarty and Nick Zieminski)