Cigna Corp. inked a deal with billionaire Warren Buffett's reinsurance unit to finally close the door on its run-off annuity business, one that will cost the Bloomfield health insurer $500 million in after-tax earnings charges.
Cigna shut down that business years ago, but has been on the hook for paying out claims that it wrote when the business was in operation.
Under the deal, Berkshire Hathaway Life Insurance Co. of Nebraska, a subsidiary of Buffet's Berkshire Hathaway Inc., has agreed to reinsure Cigna's run-off variable annuity business, which provides a type of retirement product that that guarantees benefits to retirees.
Run-off is industry lingo for the process by which insurers, to exit a market, don't sell new or renew policies, but instead allow policyholders over time to shift their business elsewhere.
Cigna said it will pay Berkshire $100 million in cash and cede about $1.8 billion of annuity investment assets as part of the deal.
In exchange, Berkshire has agreed to pay out all future annuity claims—up to $4 billion—from Cigna's book of business, reducing Cigna's risk exposure.
Cigna said it expects to record a $500 million after-tax charge in the first quarter of 2013 as a result of the deal.
"Cigna is taking this definitive strategic step to further reduce risk and continue to improve our financial flexibility," said David M. Cordani, Cigna's president and CEO. "This transaction effectively eliminates potential capital calls and income statement volatility from these run-off books of business."