General Electric intends to take a $6.2 billion aftertax charge against fourth-quarter 2017 earnings after completing a comprehensive review of the long-term care insurance portfolio within GE Capital. While GE hinted such an action would be necessary at the Nov. 13 investor update, we were surprised by the magnitude of the deficiency, particularly given that this business has been in runoff mode for over a decade; we are assessing the impact of this disclosure, but initially expect no material valuation change.
This unwelcome surprise underscores the magnitude of the task new CEO John Flannery faces as he uncovers weak points across the still-sprawling conglomerate. That said, we are encouraged that GE Capital has sufficient liquidity to support the contributions, from its $31 billion of cash and suspension of dividends to the parent; we suspect that GE Capital dividends will not resume until mid next decade, but GE's industrial business will not further strain cash flow by having to rescue GE Capital. Although management indicated that full 2017 earnings will be at the low end of the $1.05-$1.10 range, industrial cash from operations may exceed the latest $7 billion forecast.
Flannery's admission of disappointment came with further talk of the potential for aggressively changing the structure of GE's industrial portfolio, which could include spinning parts into separately traded assets, much like Synchrony and Baker Hughes. We believe the company is seriously considering these options, and with this recent call highlighting the deliberate reduction of the energy and industrial financing businesses at GE Capital going forward, we would not be surprised if even certain Power assets are on the table.