Updated from 8:14 a.m. EST
jumped 5% Thursday as investors breathed a sigh of relief after the company announced a much-anticipated charge and earnings reduction and said it was preparing to sell a large part of its troubled reinsurance unit.
"Investors had been anticipating a charge at ERC and negative earnings revision, so for the company to come out and put a floor under the estimates, that alleviates a major overhang on the stock," said Jeffrey Graff, a portfolio manager at Victory Capital Management, which owns GE shares. "That's why the stock reacted favorably."
The company also bumped its quarterly dividend up 6% to 19 cents.
GE rose 5%, or $1.34, to $26.13 in midday trading after the firm said it would take a charge of $1.4 billion, or 14 cents a share, in the fourth quarter to boost reserves at Employers Reinsurance Corp. As a result, GE now expects earnings for 2002 to be below analysts' forecasts while profits next year will also likely trail estimates.
Earlier in the week, Prudential Securities analyst Nicholas Heymann issued a research note saying he expected the charge to be in a range of $1 billion to $2 billion and that this should finally resolve the reinsurer's problems. Still, he said he expected GE to sell the unit.
During a Web cast Thursday, chief financial officer Keith Sherin said the company plans to exit its life reinsurance business, which makes up a large part of ERC, in the first half of 2003. "We're going to take our Life Re business, which is about 25% of the book here, and we're preparing a process to try to sell that business," he said.
Recent news reports have suggested that billionaire investor Warren Buffett may be interested in ERC, which is expected to post a profit of $400 million next year after a projected $1.9 billion loss in 2002.
Shares of GE have fallen 33% so far this year, partly on worries about ERC's loss exposure. Prior to Thursday's announcement, the unit had taken pretax charges of $900 million for losses related to the Sept. 11 attacks, floods in Europe and asbestos claims, among other things. In addition, ERC has been forced to enhance loss reserves for various lines of reinsurance that the business entered into during the late 1990s.
GE has also been suffering from a slowdown in its long cycle businesses after two years of robust growth.
Dave Calhoun, chief executive of aircraft engines, said during a conference that it will be two to three years before demand for engines picks up. "This industry is always in and around bankruptcy, in good times and bad," he said, adding that the downturn is manageable.
GE now expects earnings per share to reach $1.51 this year, well below analysts' consensus estimate of $1.65 a share. The company also said 2003 earnings would come in between $1.55 to $1.70 a share. Analysts surveyed by Thomson Financial/First Call were looking for a profit of 1.70.
The results reflect a decline in the earnings of its gas turbine operation and nonrecurring items including reduced pension income, nonrecurring gains, and option expense.
GE has also shifted some of its capital allocations to reduce debt at its finance unit GE Capital, saying the parent company will make a capital contribution of about $4.5 billion, with about $1.8 billion going to the reinsurance segment. As for share repurchases, GE said the program will be "continued at a reduced level" of about $500 million in 2003.