Updated from 7:23 a.m. EST
took a giant step away from risk Friday, striking a deal to sell its main insurance subsidiary to Swiss Re for $6.9 billion in stock and cash plus the assumption of about $1.7 billion of debt.
GE will end up with about 10% of the European reinsurance company's common stock in the transaction, which comprises GE Insurance Solutions, a sprawling, $52.5 billion portfolio of property and casualty, life and business insurance and reinsurance assets. The sale will result in a $2.8 billion charge for the former parent.
"This gets rid of a dog of a business, and it unmasks the good things that were going on in the rest of the company," said Foresight Research analyst Brian Langenberg. "This thing was a real eyesore for GE. It was volatile and taking cash, so this is an excellent transaction for them."
Insurance Solutions is the General Electric subsidiary that was targeted in a May subpoena related to the
Securities and Exchange Commission's
probe of finite reinsurance policies. GE said at the time the inquiry related to "certain loss mitigation insurance products" and "is general in nature."
In addition to the sale, GE also raised its quarterly dividend to 25 cents from 22 cents and expanded its share repurchase program to $25 billion through 2008. Previously, the Connecticut-based industrial and financial conglomerate had authorized the repurchase of $25 billion of its common stock through 2008.
"That basically means they're going to take the proceeds from this deal and return it to shareholders by buying back stock," Langenberg said (his firm does not have an investment banking relationship with GE, but he does have a family member that owns shares in the company).
GE said the sale price comes out to a fat 28 times the insurance unit's average annual earnings from 2003 to 2005. It said the charge reflects a loss on the Insurance Solutions book value, a goodwill write-off and taxes.
"Insurance Solutions has been a tough strategic fit for GE," CEO Jeff Immelt said in a statement. "Over the last five years, the Insurance Solutions business has lost $700 million and required the infusion of $3.2 billion of capital. By its nature, reinsurance is volatile and consumes capital to grow. The terms of this transaction provide compelling value for our shareowners as well as more certainty and greater earnings consistency in the future."
GE reiterated its 2005 earnings guidance of $1.72 a share from continuing operations, which represents its previous guidance of $1.81 to $1.83 a share minus 10 cents a share of discontinued operations related to the insurance division. Analysts were expecting $1.82 a share before the divestiture.
For 2006, GE now sees earnings from continuing operations of $1.92 to $2.02 a share, representing growth of 12% to 17%. Its old forecast was for growth of 10% to 15% over 2005. Analysts surveyed by Thomson First Call were forecasting earnings of $2.06 a share in 2006 before the Friday's sale.
Bear Stearns analyst Peter Nesvold said in a research note that the deal should raise GE's valuation on Wall Street.
"We believe the sale should ease concerns over the adequacy of GE's insurance reserves and ongoing regulatory investigations," Nesvold said (his firm has a non-investment banking business relationship with GE). "Moreover, from a fundamental basis, we believe the deal frees up GE to focus more closely on higher growth, higher margin and more capital efficient areas, such as consumer finance."
Regarding the SEC subpoena, GE said in May that Insurance Solutions unit made "limited use of reinsurance with finite characteristics to manage the risk of catastrophic events." GE's audit staff and auditor KPMG "conducted numerous reviews of these agreements during the past several years as part of the company's intensive strategic reviews of Insurance Solutions' operations, and the company is confident that Insurance Solutions' risk transfer agreements have been properly structured, properly accounted for with appropriate risk transfer, and properly disclosed," the company said in May.
GE shares were recently adding 87 cents, or 2.5%, to $35.53 on Friday.