* Berkshire gets $400 mln in cash
* Cigna reduces its exposure to risk
* Cigna plans first-quarter $500 mln charge
Feb 4 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
Cigna sells health care insurance and disability, life and
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
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.