GE’s $6.2 billion stumble reignites talk of a breakup

CEO pledges best structure "to maximise ze the potential of our businesses”

GE's global operations in Cincinnati. The company may be split up following a $6.2 billion charge. John Minchillo / AP

John Flannery promised a “reset” when he took over beleaguered General Electric last year.

Now, the new chief executive officer is suggesting that the 125-year-old manufacturer might need a lot more. On Tuesday, he said he is weighing a possible breakup of GE after the company disclosed its latest disappointment: a US$6.2 billion charge related to an old portfolio of long-term care insurance.

Mr Flannery pledged on a call with Wall Street analysts to consider changes such as separating GE's primary businesses of aviation, power generation and health care into publicly traded companies. That is a different tone than he had struck just two months ago, when he had emphasised to jittery investors that he would focus GE on those three areas instead of splitting it apart.

"We are looking aggressively at the best structure or structures for our portfolio to maximise the potential of our businesses," Mr Flannery said on a conference call with analysts. A review "could result in many, many different permutations, including separately traded assets really in any one of our units, if that's what made sense."

The chief executive suggested his openness to a breakup after disclosing a larger-than-expected $6.2bn charge related to an old portfolio of long-term care insurance. That renewed concerns about the unexpected issues that can crop up in such a sprawling enterprise - and raised questions about whether GE can cut it in today's business environment.

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“The viability of the conglomerate model is rapidly diminishing in relevance,” said Nicholas Heymann, an analyst at William Blair & Co. While GE may hang onto several of its biggest businesses, it’s becoming clear that “you have to simplify and narrow your focus.”

The shares fell 3.4 per cent to $18.13 at 3.41pm in New York after dropping as much as 4.3 per cent for the biggest intraday decline in two months. GE had staged a modest rebound this year through January 12, with a 7.5 per cent advance.

Since taking over for Jeffrey Immelt, Mr Flannery has cut costs and overhauled management as part of a broader turnaround. His efforts failed to halt a slide in GE’s shares, which posted last year’s biggest drop on the Dow Jones Industrial Average.

In November, he said the company would sell $20bn in other assets, taking the spotlight off the possibility of a more ambitious restructuring. Mr Flannery said on Tuesday he would update investors in the spring. The company reports fourth-quarter earnings January 24.

“Investors are looking at a wholesale breakup as the logical conclusion of this extended GE saga,” Deane Dray, an analyst at RBC Capital Markets, said Tuesday in a note. Whether GE follows through will depend on how successfully it can fix its power division, he said.

The company may also favour smaller moves, including an initial public offering in its jet-leasing business, Jeff Sprague, an analyst at Vertical Research Partners, said in a report.

Mr Flannery's comments stole attention from the disclosure that GE will take a $9.5bn pretax charge related to GE Capital's North American Life & Health portfolio. The after-tax impact of $6.2bn will be $7.5bn when adjusted to the rate following the recent US tax overhaul, according to a company statement. GE's finance unit will pay $15bn over seven years to fill a shortfall in reserves.

The announcement came just two months after Mr Flannery told investors that “soon we’re going to be proud of” GE’s performance. At that time, he said it would cut its quarterly dividend, shrink to a handful of businesses and essentially start anew.

“Needless to say, at a time when we are moving forward as a company, I am deeply disappointed at the magnitude of the charge,” Mr Flannery said on Tuesday on the call. “It’s especially frustrating to have this type of development when we’ve been making progress on many of our key objectives.”

The Boston company has not done any new business in the long-term care market since 2006. Still, it was saddled with obligations on contracts written years ago. The liabilities can swell when claims costs are higher than expected or when investment income fails to meet projections - a problem exacerbated by low interest rates.

GE said dividends from GE Capital to the parent company would remain suspended for the “foreseeable future” after the payment was halted during the portfolio review.

Investors have been bracing since GE warned last year about potential problems in its long-term care portfolio. At a shareholder meeting in November, chief financial officer Jamie Miller said the company was likely to take a charge in excess of $3bn, which is the amount GE Capital would have paid in a second-half dividend.

Long-term care insurance policies, which emerged in their modern form in the 1980s, cover health-related costs not paid by Medicare or standard health insurance. But the products were undermined by faulty assumptions such as how long people would live and how expensive their care would be. Low interest rates also hurt insurers’ ability to offset certain costs.

While an “outsized charge” had been anticipated, the financial impact is “far in excess” of even the worst-case scenario expectations, Tom Gallagher, an analyst at Evercore, said in a note to clients.