General Electric Co. lowered its 2002 earnings forecast yesterday and said it will take a $1.4 billion after-tax charge to boost reserves in its reinsurance unit.
GE said the charge is related to larger-than-expected claim losses over the past several years at its Employers Reinsurance Corp. unit, which it is trying to sell to investor Warren E. Buffett's Berkshire Hathaway Inc. (Buffett is a director of The Washington Post Co.)
"This is not the type of reliable performance we expect at GE," chief executive Jeffrey R. Immelt said during an investment meeting in New York.
GE forecast that its profit this year would be $1.51 per share, down 14 cents from its earlier guidance. The company said that profit would be $1.55 to $1.70 per share in 2003. In 2001, the company earned $1.41 per share. GE also said that it would raise its dividend by 1 cent, to 19 cents a share.
News of the charge had been expected, and shares of GE closed at $26.85, up $2.05, in New York Stock Exchange trading.
Like other large reinsurance companies, GE's reinsurance unit is struggling to recover from financial losses resulting from the Sept. 11, 2001, terrorist attacks, high asbestos-related claims and poor investment returns. Earlier this year Munich Re, the world's largest reinsurer, said it would inject $1.4 billion into its U.S. reinsurance business to help raise reserves.
"All the big players are underwriting the same business, and they're all experiencing similar situations," said Robert Garofalo, managing senior financial analyst for A.M. Best Co., an insurance ratings firm.
Reinsurers, which provide coverage for insurance companies, absorbed the majority of the estimated $50 billion in losses from last year's terrorist attacks. Because they had not collected premiums for terrorism coverage before the attacks, the companies dipped into their reserves to pay the claims. Reinsurers also are facing large payouts for asbestos claims.
During the stock market boom of the 1990s, the reinsurers would have recovered some of those losses through returns on investments. But that source of capital has been severely limited during the market's downturn.
Garofalo said that has forced companies such as Employers Reinsurance to pay closer attention to their core insurance businesses, which were not profitable for most of the past decade because of fierce pricing competition.
"Given the state of volatility in the capital markets, companies can no longer rely on investments to offset declines in underwriting performance," he said.
Thomas Conway, who runs the risk and capital management practice for Ernst & Young LLP, said insurance companies are experiencing problems now because of poor choices made during good times.
"One of the unfortunate things about the insurance business is that once you do something bad there's not a lot you can do to get out of it," he said. "Now that they're going through a point in the market cycle where prices are hardening, they have to prepare themselves for the next down cycle and set the risk management and market discipline in place."
General Electric had already raised reinsurance reserves by $900 million before taxes this year.
Immelt said GE will work "to fix" its reinsurance business.
"We're going to manage it with intensity," he said.