Not long after its CEO said it was close to selling its run-off variable annuity death benefit business, Cigna Corp. has reached an agreement with Berkshire Hathaway Life Insurance Co. to do just that. Under the deal announced late yesterday, Berkshire, part of Warren Buffet’s Berkshire Hathaway, Inc. group, will assume 100 percent of Cigna’s exposure to future variable annuity death benefits and guaranteed minimum income benefits (GMIB) up to $4 billion.
In a press statement, Cigna said that $4 billion far exceeds current projections of future variable annuity death benefit and GMIB claims. The chance of actual claims surpassing Berkshire’s coverage limit is “extremely remote,” according to the company. Transfer of the business was effective as of yesterday.
In mid-January, Cigna’s president and CEO David Cordani told Bloomberg that it was close to unloading its variable annuity death benefit business, which had been part of its reinsurance operations. Discontinued in 2000, the line had been in run-off mode since that time.
All told, Cigna will pay Berkshire $2.2 billion, which it will fund through the sale of $1.8 billion of assets that supported the run-off business, an estimated $300 million tax-benefit associated with the deal and $100 million in cash.
“Cigna is taking this definitive strategic step to further reduce risk and continue to improve our financial flexibility,” said Cordani in a statement. “This transaction effectively eliminates potential capital calls and income statement volatility from these run-off books of business.”
This is not the first time Berkshire has waded into the reinsurance market. Back in 2010, it acquired the life reinsurance business of Sun Life of Canada. In 2011, Sun Life exited the variable annuity business due to unfavorable product economics and heightened regulatory oversight. Hartford made a similar move, while other variable annuity insurers have cut benefits and offered buyouts to VA holders in an effort to mitigate the long-term liabilities these contracts represent.
S&P: Cigna rating unchanged
In a review of the deal, Standard & Poor’s analysts Neal Freedman and Jon D. Reichert said that Cigna’s ratings would remain unchanged.
“We believe that the agreement removes a significant distraction from Cigna’s management and that in the longer term the agreement will reduce earnings volatility and enhance financial flexibility,” wrote the S&P analysts. “Cigna may add short-term debt, which we would expect to be fully repaid by year-end 2013.”
In mid-morning trading, Cigna’s stock rose to $60.40, 3.5 percent above the day’s opening quote of $60.33.
Cigna expects to take a $500 million after-tax charge in the first quarter, which represents the payment to Berkshire in excess of its recorded reserves. It estimates that capital gains from the sale of investment assets will range between $50 million to $150 million, after tax.
The special charge and those capital gains will be included in Cigna’s net income, but not in adjusted income from operations. Therefore, Cigna’s earnings outlook for 2013 remains unaffected, according to the company’s statement.