General Electric’s profligate past is haunting its future. A fresh $6.2 billion post-tax charge relating to reinsurance, a business the company exited over a decade ago shows the challenge of managing a conglomerate. As CEO John Flannery struggles to reshape the $163 billion outfit, it’s another reason to consider a breakup.
In the 1980s and 1990s, legendary boss Jack Welch built GE Capital, the finance unit, into a behemoth that threatened to overwhelm the group’s industrial operations. Jeff Immelt, who took over from Mr. Welch and recently handed the torch to Mr. Flannery, pruned the financial services arm aggressively after the 2008-09 financial crisis.
GE sold or spun off its reinsurance operations between 2004 and 2006 but remained on the hook for certain risks, including long-term care policies.
With people living longer and healthcare costs continuing to rise, that exposure has climbed sharply. Hence the latest hit to earnings and the company’s plan to bolster its insurance reserves by $15 billion over seven years.
The deeply disappointing charge, as Mr. Flannery put it, raises the question of whether time bombs lurk elsewhere.
Mr. Flannery says the subsidiary can finance itself, but with the charge boosting its debt-to-equity ratio to 7.1 times from 4.6 times, the risk is now that it could become a drain on the group.
With GE’s stock down more than 3% by midday last Tuesday, its decline over the past 12 months totals 42%, compared with a 23% gain for the S&P 500 Index. The slide has wiped more than $110 billion off the market capitalisation of what was the world’s most valuable company at the turn of the century. Mr. Flannery says he’s considering all options.
Baker Hughes merger
Separating businesses prevents them endangering each other, making a breakup or separate listings for the group’s power, healthcare and aviation businesses a serious possibility. GE took a step in that direction last year by merging its oil and gas arm with Baker Hughes.
Yet analysts at Cowen reckon GE’s parts are worth no more than $15 a share, less than its current stock price, making the financial benefits questionable. For Mr. Flannery, breaking up may be hard to do.
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
