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Latest push to shrink GE Capital evokes era not long past

The audience at the recent Electrical Products Group conference may have experienced déjà vu listening to a General Electric Co. CEO discuss his plans to shrink GE Capital.

But rather than Jeffrey Immelt touting the initial success of GE's spring 2015 initiative to divest tens of billions of dollars' worth of GE Capital commercial finance businesses and portfolios, it was his successor outlining his vision three years later for de-risking what remains of the once-mammoth financial services franchise.

On four separate occasions during his May 23 appearance at the conference, John Flannery vowed that GE would further shrink GE Capital through a series of actions that include ongoing asset reductions in the energy financial services and industrial finance businesses in addition to managing down its insurance exposure. The insurance business, which most notably consists of the reinsurance of long-term care policies issued years ago, contributed $6.16 billion to a net loss of $6.39 billion at GE Capital in the fourth quarter of 2017.

Upon announcing the insurance charge in January, GE revealed plans to reduce GE Capital's assets by about $15 billion over the course of the subsequent two years through steps that include asset sell-downs, transitioning originations from energy financial services to the capital markets and leaning on external banks to handle business volume in industrial finance, which includes GE's healthcare equipment finance, working capital solutions and industrial financial solutions operations. Flannery said during his conference presentation that GE expects to announce or complete about half of the $15 billion in planned asset reductions in 2018.

GE Capital's total assets of $146 billion as of March 31 signified a year-over-year decline of 12.7%. GE Capital had total assets of $476.5 billion as of March 31, 2015, as Immelt's divestiture program began. Approximately $40.5 billion of the most recent total pertains to GE Capital Aviation Services Inc., the commercial aircraft and engine lessor. Flannery confirmed that GE Captial Aviation Services, which generated $283 million in net earnings in the first quarter, is "performing well" and that GE plans to retain the business. Assets in the energy financial services and industrial finance businesses totaled $10 billion and $22.6 billion, respectively.

Flannery said that the asset-reduction initiative is "going well" and that GE Capital achieved considerable success in executing the 2015 divestiture program. But the fate of GE Capital's former mortgage lending business and the problematic insurance operations are more of an open question.

The company booked a $1.5 billion reserve in the first quarter connected to the U.S. Department of Justice's investigation of potential years-earlier violations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 by GE Capital and WMC Mortgage Corp. Flannery confirmed that settlement discussions regarding that investigation are ongoing. GE previously said it believed that the Justice Department would initiate legal proceedings against GE Capital and WMC should they fail to reach an acceptable settlement of the matter.

Regarding the insurance business, recently published reports indicated that GE had been working with investment bankers to potentially structure an exit strategy. Flannery described the situation as complex but manageable, and he said GE is "looking at everything possible" to reduce its insurance exposure.

In the meantime, Flannery said, GE is "managing that liability as aggressively as we can" in terms of claims-handling, investment strategy and negotiating with primary insurers. He confirmed that an executive named Robert Deutsch had joined GE to assist in that process. Company spokespeople did not return a message seeking additional information, but the Robert Deutsch most closely identified with the insurance industry has many years of experience in reinsurance and private equity, including as a director at life reinsurer Wilton Re Ltd. and at a subsidiary of runoff specialist Enstar Group Ltd.

The insurance businesses that GE Capital retains have survived two previous divestiture pushes, both in 2015 and in a mid-2000s effort by Immelt that was highlighted by the separation of Genworth Financial Inc. and sale of Employers Re's P&C business. But the circumstances have changed dramatically since, and Flannery said that "if we saw something that made sense, we would be highly motivated to do it."

Divestitures of long-term care business have proven challenging, given a limited pool of buyers or reinsurers that would be willing and able to execute such a transaction. The status of GE's Union Fidelity Life Insurance Co. and Employers Reassurance Corp. as the reinsurer or retrocessionaire of books of business assumed from a wide range of counterparties adds layers of complexity to an already challenging situation.

Flannery said GE's pursuit of a transaction would "ultimately be a function of market factors [and] proposals that we get or don't get."