GE split should start with insurance black box

A General Electric sign is seen at the third China International Import Expo (CIIE) in…

A General Electric sign is seen at the third China International Import Expo (CIIE) in Shanghai, China November 5, 2020. REUTERS/Aly Song//File Photo

NEW YORK, Nov 17 (Reuters Breakingviews) – The breakup of General Electric (GE.N) is a victory for transparency read more , but there’s one part of the U.S. industrial firm that sunlight still doesn’t reach. That’s its $38 billion long-term care insurance business, formerly the source of some nasty surprises . Now is a good time for Chief Executive Larry Culp to cut the bothersome business loose.

GE makes almost all its revenue and profit from jet engines, power turbines and medical machinery. Tacked on to that is a division that insures the old-age care costs of around 316,000 Americans as counted at the end of 2020. Shifting actuarial assumptions led to a $6.2 billion charge in 2017, and a $200 million fine in 2020 .

Now there’s an accounting change for insurers that will apply from January 2023. GE currently sizes up future obligations using a discount rate of around 6.2%. The new rule would cut that to perhaps 2% at current market prices. That on its own could incur a $13 billion pre-tax charge based on sensitivities GE reported in October, which wouldn’t affect GE’s cash flows but would eat into its book equity of $37 billion at the end of September.

There may be surprises in the other direction thereafter. Fellow old-age insurers have found Covid-19 led to a rise in deaths and a drop in claims, according to consultant Milliman. If more policyholders end up staying in their own homes rather than moving to facilities, expected payouts could fall given the average cost of a home health aide is roughly half the price of a private room in a nursing home.

Such shifts would take years to show up in insurers’ long-term assumptions. The result is an opportunity for a potential buyer, though. For Culp, meanwhile, the case for selling is stronger than it has been in years. The insurance division will sit with GE’s jet-engines division, which will by 2024 be a stand-alone listed company, but there’s no logic to those businesses cohabiting.

With the policies fully funded for now, Culp is well placed to lure a buyer. GE’s insurance reserves are roughly 11% more than it expects to need. That suggests, very simplistically, a gain of around $3 billion if Culp finds a buyer who shares his assumptions. Leave that on the table for the next owner, and Culp can focus on caring for his shareholders instead.

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– General Electric said on Nov. 9 that it plans to split into three publicly-listed parts.

– The U.S. conglomerate will hive off its healthcare business in 2023, keeping a 19.9% stake, and its energy and power division in 2024, leaving its jet-engine division as a stand-alone company.

– Chief Executive Larry Culp will continue to lead the aviation business, while also serving as non-executive chair of the healthcare company after it is spun off.

– GE has $37.7 billion of estimated future payments related to its long-term care insurance business, which covers old-age care costs for around 316,000 people, as counted at the end of 2020.

– The policies will sit with the aviation business after GE’s breakup. GE holds 11% more in reserves than it expects to need, based on the firm’s annual test conducted in September.

Editing by Swaha Pattanaik and Amanda Gomez

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