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.
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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.