The Economist Asia - 20.01.2018

56 Business The EconomistJanuary 20th 2018

2 the league’s coffers somewhat).

In France, Ligue 1 bosses had hoped for

a significant bid from SFR, Altice’s French

telecom business, to challenge market

leader Canal+, owned by Vivendi, when

they call forbids. The current contracts,

worth €727m ($889m) annually, run to

2020. But Altice’s share price has lately
      plunged and the firm is sellingassets; an
      expensive football bid looks unlikely.
      In Italy, Mediaset Premium, one of two
      incumbent broadcasters(along with Sky),
      declined to bid for renewal lastyear, forc-
      ing Serie A to regroup for a new round of
      bidding, due by January 22nd. Mediaset,
      controlled by the Berlusconi family, has
      pledged to reduce football costs. Enders
      Analysis reckons it may go for a smaller
      package of games; Sky knows the market is
      soft. The league may struggle to match its
      current take of €990m per year.
      In each market the value proposition of
      sport is in question. Football has been an
      important way to get consumers to sign up
      fo rTVbundles, yet high rights fees have
      dragged down earnings. Fans can get foot-
      ball highlights—ie, the goals—at no charge
      on social media, or watch pirated streams.
      Might all that also portend trouble for
      the biggest sports media market, America?
      Disney’s sports channel, ESPN, has lost mil-
      lions ofsubscribersin recent years due to
      cord-cutting (people dropping pay-TV).
      Viewership of pricey cable channels is in
      structural decline, as people spend more
      time on services like Netflix (or gawping at
      their phones). Live sport is still seen as a
      linchpin of pay-TV, a way to draw and
      keep customers, as ithas been in Europe.
      The appetite for sport in America is
      more diverse, which allows networks to
      build fuller schedules of fixtures, improv-
      ing the appeal of pay-TV. The demand
      from viewershas been sufficient to sustain
      multiple bidders for rights, and to attract
      interest from new players such as Amazon.
      The contracts are longer, helping networks
      build long-term businesses (the next big
      rights renewal, for American professional
      football, is not until 2022). Still, Europe’s
      auctionssuggestthe economics of tele-
      vised sport may slowly be recalibrated. 7

Goal driven

Source: Enders Analysis

English Premier League football

Cost of broadcasting rights, £bn per season

Years covered

0

0.5

1.0

1.5

2.0

1992-

97

97-

01

2001-

04

04-

07

07-

10

10-

13

13-

16

16-

19

Sky BT Setanta ESPN

D

ECISIONS made long ago, and often

long since forgotten, can come back to

haunt. General Electric (GE), an American

industrial conglomerate, has discovered

that to its chagrin. On January 16th the

company said it would have to take a

$9.5bn charge (before tax) on old reinsur-

ance contracts in its financial arm, GECapi-

tal—despite exiting the insurance business

in the mid-2000s. The firm also said it

would have to set aside up to $15bn of addi-

tional reserves forGECapital over seven

years. The conglomerate had already been

struggling, with its share price down by

over 40% in the past year. News of the lat-

est hit, which the company’s chief execu-

tive, John Flannery, called “deeply disap-

pointing”, sent its shares plunging by a

further 3% on January 16th alone.

The issue at hand concerns reinsurance

contracts in GECapital’s American life-

and health-insurance portfolio. Jack

Welch, an idolised formerGEboss, had

massively expanded the firm’s financial

arm in the 1980s and 1990s, including into

insurance. Mr Welch’s successor, Jeff Im-

melt, who took over at the company in

2001, bought and sold a huge number of

businesses during his tenure. Even before

the 2007-08 financial crisis, which

prompted the firm massively to pare back

GECapital, it had already spun out much

of its insurance business into Genworth Fi-

nancial, an American insurance company

which listed in 2004 in the biggest initial

public offering of that year, and sold the

rest of it to Swiss Re, a reinsurer, in a deal

worth $6.8bn, in 2006.

Mr Immelt conceded at the time of the

insurance sale that the business had al-

ways been a “tough strategic fit” forGEbe-

cause of its low returns, volatility and need

for capital. But a number ofsubstantial life-

and health-reinsurance liabilities, notably

those related to long-term care insurance

(which pays for products such as nursing-

home care for the elderly), were left out of

both the 2004 listing and the Swiss Re deal,

although GECapital did at least stop issu-

ing new contracts.

That in the 12 years since then the firm

appears to have done little about this resid-

ual portfolio seems an odd omission. The

risk, after all, was well known. Other firms

had problems with policyholders living

longer and incurring higher medical costs

than insurers had built into their initial as-

sumptions; the long-term care market as a

whole in America has run into trouble.

One Pennsylvania insurer, Penn Treaty,

was liquidated in 2017 after being left with

just$500m in assetsto cover a projected

$4.6bn in claims.

Opportunities forGEto offload legacy

risks were plentiful. Ever more firms have

become willing to acquire legacy insur-

ance liabilities at the right price—not just

large reinsurers like Swiss Re, but other in-

vestors, too. The Hartford, a large Ameri-

can insurer, in December sold its legacy life

and annuity unit to a consortium of half a

dozen investors, providing it with a full exit

and a lump sum of money upfront, though

it still had to take an overall (one-off) loss.

AtGE, the scale of the problem seems to

have only been recognised after Mr Flan-

nery, who started in the top job in August,

commissioned a review involving outside

experts in the autumn.

The reinsurance charges, then, are best

viewed as the most serious revelation yet

to emerge from Mr Flannery’s houseclean-

ing atGE. That process may be a prelude to

more radical reforms than those Mr Flan-

nery announced last year. Then he pro-

posed refocusing the firm around three

core business areas—aviation, power and

health care—and a divestment of $20bn in

assets (out of total assets of $365bn), along

with other tweaks such as changes to the

board of directors. Now he is veering to-

wards more dramatic moves, raising the

possibility on an investor call this week of

full or partial spin-offs “in any one of [GE’s]

units”. GEexecutives reportedly consider

some form of break-up probable, though

that would not prevent a large sum of capi-

tal being tied up atGECapital for the fore-

seeable future. Stockmarket analysts are di-

vided over whether such spin-offs would

add much to GE’s total valuation. Come

what may, paying close attention to exist-

ing assets and liabilities would help. 7

General Electric

Regrets are not

enough

After a huge loss on old reinsurance

contracts, GE contemplates a break-up

Flannery kitchen-sinks it