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Moody's: Cigna deal with Berkshire a credit positive

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Moody’s Investor Service (Moody’s) views the recent announcement by Cigna Corporation (Cigna) to reinsure its variable annuity business as a credit positive for the company.

Last week, Cigna announced that they had arrived at a definitive agreement with Berkshire Hathaway Life Insurance Company, a subsidiary of Berkshire Hathaway Inc. (Berkshire), to reinsure its guaranteed minimum death benefits and guaranteed minimum income benefits businesses, both of which are currently in runoff.

Under the agreement, Cigna will pay Berkshire $2.2 billion which it will fund through the sale of $1.8 billion of assets that supported the runoff business, an estimated $300 million tax-benefit associated with the deal and $100 million in cash. Berkshire’s liability under the agreement is capped at $4 billion although Cigna cautioned that exceeds current projections for future variable annuity death benefit and guaranteed minimum income benefit claims.

Moody’s said that although the cost of the transaction will temporarily offset positive effects, the deal is a wise strategic maneuver  that will contribute to the overall vitality of Cigna down the road.

The contracts in the deal have been in runoff for the past several years in an effort by Cigna to reduce risk, remain financially limber and lower capital requirements. While the books have been in runoff, Cigna has been able to allay risk by implementing a hedging strategy to reduce equity exposure, although they remained vulnerable to net income volatility were their reserving assumptions incorrect. The deal with Berkshire shields them from a large portion of adverse claim development.

Moody’s views the agreement as a component of Berkshire’s overall strategy of writing large premium reinsurance transactions with long-duration liabilities which avails the company to follow a long-term equity-focused investment strategy.

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.

If interest rates in the equity market continue to rise, Moody’s feels that transactions like Cigna’s and Sun Life’s could be indicative of a larger, burgeoning trend.

Moody’s views the deal as an augur for a credit positive environment for other insurers with variable annuity exposures. Where there was once a paucity of potential buyers for variable annuity blocks, companies like Berkshire and alternative investment managers are ideal candidates because of their capacity and liquidity. 

Typically, alternative asset managers have been active in the market for fixed annuities, rendering insurers with extensive variable annuity exposure that they are looking to unload with little options for buyers, Moody’s anticpates a sea change in the market with more buyers being open to variable annuties.