Health insurer Cigna Corp. (CI: Quote) said Monday that under a $2.2 billion deal, Warren Buffett's Berkshire Hathaway Inc. (BRKa,BRK-A: Quote,BRK-B: Quote) will reinsure the company's risk related to future claims for two annuity businesses it has exited.
Berkshire will assume up to $4 billion of future claims related to the businesses and also get $1.8 billion in investment assets, while the deal will enable Cigna to reduce risk from the death-benefits and retirement products.
Under the deal, Berkshire Hathaway Life Insurance Co. of Nebraska will reinsure Cigna's Run-off Guaranteed Minimum Death Benefits or VADBe, and Guaranteed Minimum Income Benefits or GMIB businesses, effective Monday, February 4.
Cigna stopped writing reinsurance, including variable annuity death benefits or VADBe, in 2000 and these businesses have been in run-off since that time.
David Cordani, President and Chief Executive Officer of Cigna said, "Cigna is taking this definitive strategic step to further reduce risk and continue to improve our financial flexibility. This transaction effectively eliminates potential capital calls and income statement volatility from these run-off books of business."
Berkshire will assume 100 percent of Cigna's exposure up to $4 billion of future VADBe and GMIB claims which, Cigna noted, is significantly in excess of current projections of future claims for this business. Cigna believes the potential for actual claims to exceed the limit of the coverage from Berkshire is "extremely remote".
Cigna will fund the deal with an incremental $100 million of cash, about $1.8 billion of investment assets supporting the run-off businesses, and an estimated tax benefit of $300 million.
Cigna expects to incur an after-tax charge of $500 million in the first quarter of 2013 after recording the exit transaction as a special item. The charge represents the amount of payment to Berkshire that is in excess of Cigna's recorded reserves.
Cigna expects realized capital gains from the sale of investment assets supporting the business in a range of $50 million to $150 million after-tax, depending on whether the assets are sold externally or transferred to other internal portfolios.
Cigna will include the special item charge for the exit transaction and the expected realized capital gains on the sale of assets in its net income, but it will not be included in adjusted income from operations.
As a result, Cigna's earnings outlook for fiscal 2013, which is based on adjusted income from operations, will not be impacted by this transaction. Cigna noted that the transaction will not affect its outlook regarding capital that is available for deployment in 2013.
CI closed Monday's trading at $58.35, down $0.53 or 0.90 percent on a volume of 1.49 million shares. In after-hours, the stock gained $1.70 or 2.91 percent to $60.05.
by RTT Staff Writer
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