General Electric (GE) shares fell yet again after the company was blindsided by huge expenses relating to their legacy insurance portfolio. Due to miscalculations and past blunders, it was revealed that GE will have to funnel $6.2 billion into the struggling insurance unit next quarter. General Electric will also have to pay $3.4 billion due to the new tax bill and $1.8 billion for energy financing shortfalls in GE capital, bringing the total 4th quarter bill to $11 billion. To make things even worse, GE will also have to set aside $15 billionover the next 7 years to maintain the unit's cash reserves. The magnitude of these charges cannot be understated, and it even surprised the most bearish analysts on Wall Street. In light of this news, CEO John Flannery is actively thinking of breaking the conglomerate up - a move that should be welcomed by long-term shareholders.
Before we look into the potential implications of a breakup, it's worth the time to break down the life insurance related charges and see where the company is right now. General Electric has roughly 300,000 insurance policies they need to cover, and they need $50,000 per policy in reserves to cover any potential payout expenses. The end figure amounts to a $15 billion bill, which needs to be paid out over a 7 year time span. General Electric plans to pay for this bill by shelling out $3 billion this quarter and then $2 billion annually until the end of 2024. Although these charges were expected, the market did not expect them to be this pricey. As I am writing this, General Electric trades at $16.77 per share, giving it a $145.43 billion market cap. The bill amounts to more than 10 percent of General Electric's current market cap! It also raises a serious alarm over General Electric's other assets and creates the possibility that there may be other undiscovered landmines deeply planted within the conglomerate.
