UPDATE 1-Cigna and Berkshire sign $2.2 billion reinsurance deal

Mon Feb 4, 2013 6:09pm EST

* Berkshire gets $400 mln in cash

* Cigna reduces its exposure to risk

* Cigna plans first-quarter $500 mln charge

Feb 4 (Reuters) - Cigna Inc. and Warren Buffett's Berkshire Hathaway Inc struck a $2.2 billion deal in which Berkshire will reinsure Cigna's risk related to future claims for two annuity businesses Cigna has exited.

The move will reduce risk for Cigna by eliminating the possibility of a capital call as well as volatility, it said, adding that it had exposure for up to $4 billion in future claims.

Cigna sells health care insurance and disability, life and accident insurance.

It was a reinsurer for the two closed annuity businesses, collecting a premium in return for assuming the risk of the difference between the minimum benefit and the portfolio value. There have been no new policies written since 2000 and the business has been in run-off since then.

Some of the top producers of variable annuities have either exited the business or said they would scale back sales, given the risks involved. In a persistently low interest rate environment like the one life insurers have faced in the last few years, the guaranteed benefits on some kinds of variable annuities become harder to guarantee.

Berkshire will receive $1.8 billion in assets related to the businesses and another $400 million, including $100 million in cash and $300 million funded from a tax benefit Cigna will receive.

The assets, which according to Fitch Ratings include both public and private bonds as well as commercial mortgages, support the guaranteed minimum death benefit annuities and guaranteed minimum income annuities.

Fitch said there were no changes to its credit ratings for Cigna because of the deal.

Cigna said it will take an after-tax charge of $500 million in its first-quarter earnings to cover the gap between the payment to Berkshire and its recorded reserves. It is to report fourth-quarter results on Feb. 7.

While it affects Cigna's net earnings, the company said the charge will not change its earnings per share excluding items, the number that Wall Street tracks.

The reinsurance deal is not unusual for Berkshire, which has done a number of transactions over the years with insurers seeking to rid themselves of a particular book of business.

In April 2011, Berkshire struck a $1.65 billion deal with AIG to take on that insurer's U.S.-based asbestos risk. It did a similar deal with CNA Financial Corp in 2010 and with a Lloyd's of London affiliate in 2006.

For Buffett, the deal is a bet that he can make more money on the upfront fee plus the investment assets than Berkshire will have to pay out over time in policyholder claims.

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California state worker Albert Jagow (L) goes over his retirement options with Calpers Retirement Program Specialist JeanAnn Kirkpatrick at the Calpers regional office in Sacramento, California October 21, 2009. Calpers, the largest U.S. public pension fund, manages retirement benefits for more than 1.6 million people, with assets comparable in value to the entire GDP of Israel. The Calpers investment portfolio had a historic drop in value, going from a peak of $250 billion in the fall of 2007 to $167 billion in March 2009, a loss of about a third during that period. It is now around $200 billion. REUTERS/Max Whittaker   (UNITED STATES) - RTXPWOZ

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