Warren Buffett’s Berkshire Hathaway Inc. (A:US) is taking on as much as $4 billion in liabilities from Cigna Corp. (CI:US) as the third-biggest U.S. health insurer seeks to reduce risk from death-benefits and retirement products.
Cigna will pay $2.2 billion to Omaha, Nebraska-based Berkshire, according to a statement yesterday from the Bloomfield, Connecticut-based health insurer. The transaction will be funded with $1.8 billion in investment assets, $100 million in cash and an estimated $300 million tax benefit.
Buffett, 82, and his reinsurance chief Ajit Jain have assumed obligations from insurers seeking to cut risk or narrow their focus. The contracts give Berkshire’s billionaire chairman and chief executive officer more funds to invest and make acquisitions at the firm he’s built from a failing textile maker into a company with more than 70 operating units (2FA:US).
Cigna investors have been “waiting on this for a long time, so I imagine the reaction to it will be positive,” David Windley, a Jefferies & Co. analyst in Nashville, Tennessee, said in a phone interview.
The health insurer climbed 3.2 percent to $60.19 at 11:31 a.m. in New York. Buffett’s firm rose 0.9 percent.
Investors including Leon Black’s Apollo Global Management LLC and Guggenheim Partners LLC have been assuming assets and liabilities tied to annuities as insurers retreat from the business. Declining interest rates have made guarantees embedded in the products more costly and weighed on earnings at companies including Hartford Financial Services Group Inc. (HIG:US) and Genworth Financial Inc.
Buffett has used insurance float, or the premiums collected before paying claims, to fuel growth at Berkshire over the past four decades. Jain has helped raise those funds, which totaled $72 billion at the end of September, by cutting deals with firms including American International Group Inc. and CNA Financial Corp. to assume asbestos liabilities and sell protection for the costliest natural disasters.
Life insurers took on what Buffett has called an “ungodly” amount of risk and accumulated liabilities as Treasury yields dropped below 2 percent, making it harder to generate returns to cover the obligations.
Cigna CEO David M. Cordani said last month that his company was ready to get rid of its death-benefits unit, which has been closed to new business for more than a decade. Costs for annuities fluctuate with interest rates and the uncertainty has been a drag on Cigna’s stock, Windley said.
Buffett is assuming liabilities from units that have about 435,000 active policies, down 10 percent over 2012, Cordani said yesterday on a conference call. The sale will have no impact on Cigna’s earnings forecast this year or its capital deployment plans, said Chief Financial Officer Ralph Nicoletti. Cigna expects to finish its payments to Berkshire “well before the end of 2013,” he said.
Cigna said it will take a $500 million after-tax charge in the first quarter tied to the transaction, according to the statement. Cordani said the company will sell fixed-income securities that are among the investment assets, and transfer cash to Berkshire.
Bank of America Corp. (BAC:US) was Cigna’s financial adviser and Skadden, Arps, Slate, Meagher & Flom LLP provided legal advice.
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