Last summer, General Electric (NYSE: GE) began a thorough review of its insurance obligations -- a legacy of its once-massive GE Capital business -- because of higher-than-expected claims on an old long-term-care reinsurance portfolio. Expecting a big charge, management stated that GE Capital would not pay any dividends to GE until the review was complete.

General Electric recently finished this review, and the results were worse than expected, leading to a $9.5 billion pre-tax charge. This outcome caused GE stock to plummet 13.3% last week, its worst weekly performance since the Great Recession.

General Electric stock performance data by YCharts.

The massive decline in GE's stock price knocked more than $20 billion off its market cap. That seems like a clear overreaction on investors' part.

General Electric takes a big charge

During the past few months, GE undertook a thorough analysis of its insurance liabilities to determine what it is likely to owe. It hired two independent actuarial consulting firms to work with the internal GE Capital team on the review.

Back in November, new CFO Jamie Miller told investors the company was likely to take an after-tax charge of more than $3 billion related to the insurance review. The actual after-tax charge was twice that size -- $6.2 billion -- under the 2017 tax system, and $7.5 billion including the impact of tax reform.

The cash impact of the insurance shortfall will be even larger. GE Capital will contribute a total of approximately $15 billion to its insurance reserves over the next seven years. Doing so will prevent GE Capital from paying any dividends to the parent company for at least a few years.

Analysts (and investors) panic again

GE had telegraphed the fact that the insurance review would lead to a sizable special charge, but the ultimate size of that charge was significantly larger than analysts and investors had expected. Still, even looking at the cash cost of $15 billion -- which will be smaller net of taxes -- it doesn't really justify the extent of GE stock's recent decline.

However, the bad news on the insurance front brought out the GE bears in full force. Deutsche Bank analyst John Inch struck the most alarming tone, warning that General Electric faces a "cash crunch" and could be forced to cut its dividend again, raise equity, or both.

One analyst thinks GE Power's problems will create a cash crunch. Image source: General Electric.

Meanwhile, Cowen analyst Gautam Khanna repeated his contention that GE stock could be worth as little as $11 if the company were broken up -- one option management floated -- after accounting for its debt and pension liabilities.