By Alwyn Scott
NEW YORK (Reuters) - General Electric (NYSE:GE) Co will invest more heavily in junk bonds, private equity and other high-yield investments to boost returns at its ailing insurance business, company executives said on Thursday.
Seeking to calm investors about its insurance liabilities, GE said its insurance investments are too conservative compared with competitors. The change will allow for better returns that help reduce the amount of reserves it must set aside for claims, Anthony Grandolfo, the chief investment officer of GE's insurance business, told analysts on a conference call.
Asked about increased risk, he said GE was still being prudent. "We're starting from a point where we think (the portfolio) is quite conservative and we expect to continue to maintain a portfolio that is quite conservative," said Grandolfo, who was hired as GE's first dedicated chief investment officer for insurance in October.
Only 2 percent of GE's insurance assets are currently in non-investment-grade investments - much less than the 12 percent average in the industry, Grandolfo said, citing a Goldman Sachs (NYSE:GS) study. GE plans to gradually increase its level to 8 percent by 2024, he added.
GE has also hired two other executives to run its insurance unit: Chief Executive Officer Tim Kneeland, who formerly handled long-term care policies at Transamerica, and Managing Director Bob Deutsch, former chief financial officer at CNA Financial.
In a presentation https://www.ge.com/investor-relations/sites/default/files/GE_Capital_Insurance_Teach-In_Presentation.pdf that repeated information GE supplied in its annual report last week, the Boston-based conglomerate said it has achieved about $500 million worth of premium increases that it is in the process of putting in place. It is also pressing for $1.2 billion in further increases to help stem losses on some 300,000 long-term care insurance policies, which cover costs for services such as in-home or nursing-home care.
GE shares were up 2.3 percent at $9.32 on Thursday.
Investor focus now turns to GE's presentation of its full-year forecast, scheduled for March 14.
GE shocked investors when it took a surprise $6.2 billion after-tax charge last year and began setting aside $15 billion - one of the largest such amounts ever - to cover the policies that were underwritten more than a decade ago, when actuaries did not yet know how costly the claims would become.
GE's insurance losses are among a host of problems the 127-year-old company is facing as it attempts a breakup under new Chief Executive Larry Culp in an effort to restore profit and buoy its stock, which has tumbled to less than a third of its value in mid-2016.
The company also said it is looking at "options" to reduce its insurance risk, adding to hints from Culp on Tuesday about possible sales of parts of the business.
GE's massive power-plant business is hemorrhaging cash and contending with falling sales and technical problems, while the company is selling assets to pay down its outsized debt.
Since last year, GE has reduced the total amount of insurance reserves it plans to set aside to $14.5 billion by 2024 after completing an analysis of the policies.
But some analysts have said GE may need to nearly double that amount because assumptions it used to calculate the exposure are optimistic.
As a reinsurer, GE cannot seek premium increases directly. It must rely on about 30 companies that underwrote the policies it holds to seek increases from regulators in the numerous U.S. states where they were sold.
GE's target for new reserves amounts to about $55,000 per policy, compared with $77,282 at Humana Inc (NYSE:HUM) and $10,614 at Unum Group (NYSE:UNM), according to an analysis for Reuters by Audit Analytics, an independent research company based in Massachusetts.
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