Cigna and Berkshire sign $2.2 billion reinsurance deal

Mon Feb 4, 2013 6:59pm EST
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(Reuters) - Cigna Inc.(CI.N: Quote) and Warren Buffett's Berkshire Hathaway Inc (BRKa.N: Quote) 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 February 7.   Continued...