John Flannery promised a "reset" when he took over General Electric Co. last year.
Now, the new chief executive officer is suggesting that the 125-year-old manufacturer might need a lot more. Flannery said Tuesday that he's weighing a possible breakup of GE, once one of the most celebrated U.S. companies.
Flannery, who has been cleaning up messes since taking the helm in August, promised to consider changes such as separating GE's primary businesses of aviation, power generation and health care into publicly traded companies. While he vowed last year to consider all options, he emphasized a plan in November to 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 maximize the potential of our businesses," 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."
Flannery's breakup suggestion came after disclosing a larger-than-expected $6.2 billion 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.
"The viability of the conglomerate model is rapidly diminishing in relevance," said Nicholas Heymann, an analyst with William Blair & Co. While GE may hang on to several of its biggest businesses, it's becoming clear that "you have to simplify and narrow your focus."
The shares fell 3.8 percent to $18.04 at 2:01 p.m. in New York after dropping as much as 4.3 percent for the biggest intraday decline in two months. GE had staged a modest rebound this year through Friday, with a 7.5 percent advance.
Since taking over for Jeffrey Immelt, Flannery has cut costs and overhauled management as part of a broader turnaround. His efforts couldn't 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 $20 billion in other assets, taking the spotlight off the possibility of a more ambitious restructuring. Flannery said Tuesday that he would update investors in the spring.
GE will take a $9.5 billion pretax charge related to GE Capital's North American Life & Health portfolio, according to a company statement. The after-tax impact of $6.2 billion will be $7.5 billion when adjusted to the rate after the recent U.S. tax overhaul. GE's finance unit will pay $15 billion over seven years to fill a shortfall in reserves.
The announcement comes just two months after 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," Flannery said 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-based company hasn't 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 $3 billion, which is the amount GE Capital would have paid in a second-half dividend.
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.
Long-term care insurance has become a headache for many of the companies active in that market in recent decades.
The 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.
"Things really started to fall apart" for the long-term care market in the early 2000s, said Joseph Belth, professor emeritus of insurance at Indiana University. "Companies found that they had to raise rates frequently and substantially, and everybody was unhappy."
Once the largest issuer of long-term care policies, GE has been working for years to limit the volatility tied to financial industries such as insurance. The company spun off Genworth Financial Inc., which has also faced problems with long-term care.
GE announced a plan in 2015 to sell the bulk of GE Capital's operations. The company said Tuesday that there will be "ongoing actions" over the next two years to further shrink the finance business.
Business on 01/17/2018