GE May Break Apart, Here's Why

General Electric is considering breakup options after taking a major tax hit related to an old portfolio of long-term care insurance.

Breaking up is hard to do, as General Electric may soon find out.

The company said it will take a $9.5 billion pretax charge related to GE Capital's North American Life & Health, an old portfolio of long-term care insurance. The after-tax impact of $6.2 billion will be $7.5 billion when adjusted to the new 21% U.S. tax rate, CEO John Flannery told investors on a conference call Tuesday, according to SeekingAlpha transcripts.

GE Capital will make a $3 billion contribution to its insurance subsidiary in the first quarter of 2018 and roughly $2 billion a year from 2019 to 2024, for a total of roughly $15 billion, the company disclosed in a press release Tuesday.

GE entered into insurance through a series of acquisitions in the 1980s and 1990s. GE North America Life & Health is comprised of the legacy reinsurance businesses that remained at GE following the 2004 and 2006 Genworth and ERC exits.

After taking over as CEO last year, Flannery laid out a plan in late October for the conglomerate to shed $20 billion worth of assets over the next one to two years.

"Needless to say, at a time when we are moving forward as a company, I'm deeply disappointed at the magnitude of the charge in this legacy portfolio," he said during Tuesday's investor call. "It's especially frustrating to have this type of development when we've been making progress on many of our key objectives. These include cost-out in corporate and our power business, improving our cash flow and continued strength in aviation and healthcare."

Flannery noted that the company's decision to exit the majority of its insurance business between 2004 and 2006 was the right one. GE reduced its exposure by $130 billion of assets and in return got $13 billion of cash, which was reinvested back into the company, he said.

"We did this in advance of the financial crisis, and it significantly derisked GE Capital. The decision to retain the current books of insurance-related business was based on a view at that time that a gradual runoff would yield a better economic result," Flannery said. "Clearly, in hindsight, we underappreciated the risk in this book."

He explained that in 2015, as part of the GE Capital exit process, the company again reviewed its insurance exposure and determined that it had looked at exit options when the interest rate environment was more favorable.

"In 2017, as a result of the trends we saw, specifically in our long-term care book, we initiated a comprehensive review in mid-2017 that included a rebuild of all of the cost curves associated with our book," Flannery said, adding that it was a detailed process that included a review by two independent actuarial firms as well as the company's third-party auditor, KPMG.

GE ended the year with about $31 billion in cash.

Flannery said GE will continue to review its alternatives to deliver shareholder value and "report out to you as when they progress this spring."

What Does This Mean for GE Healthcare?

Flannery reiterated a focus on the company's three core segments: power, which includes renewables; aviation; and healthcare.

Some of his comments during Tuesday's call made it clear, however, that even some of GE's healthcare assets could end up on the chopping block.

"But the real core approach here is to make sure that these businesses can flourish in the decades ahead and that they have the right capital structures and investment resources to do that."

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