Has GE’s Capital Hole Been Fully Dealt With?
Before investing in any business you want to ensure its capital adequacy is sufficient. In January market chatter suggested GE’s pension shortfall could have been as much as $30 billion. Over 600,000 current and former GE employees rely on pension benefits. I understand the pension fund had a $15 billion surplus in 2007. In this low interest rate environment it could be difficult to earn the crediting rate originally assumed on the fund assets. This differential in the assumed crediting rate and actual crediting rate could amplify GE’s pension shortfall.
In January GE announced a $6 billion after-tax charge related to its insurance operations. The company also intimated it needed to make $15 billion in reserve contributions for its insurance business over the next seven years. The reserve increases were mainly related to GE Capital’s run-off long-term care (“LTC”) portfolio, North American Life & Health (“NALH”).
At a minimum, potential insurance reserve requirements could continue to limit the amount of upstream dividends GE Capital can provide to the parent company. The worst case is that GE could required to raise additional equity to fund its obligations. It could behoove Berkshire to wait until the smoke clears being investing in GE.
