Cigna Inc. and Warren Buffett's Berkshire Hathaway Inc
The move will reduce risk for Cigna by eliminating the possibility of a capital call as well as volatility, it said, adding that it had exposure for up to $4 billion in future claims.
Cigna sells health care insurance and disability, life and accident insurance.
It was a reinsurer for two closed annuity businesses, collecting a premium in return for assuming the risk of the difference between the minimum benefit and the portfolio value. There have been no new policies written since 2000 and the business has been in run-off since then.
Berkshire will receive $1.8 billion in assets related to the businesses and $400 million, including $100 million in cash and another $300 million funded from a tax benefit Cigna will receive.
The assets, which according to Fitch Ratings include both public and private bonds as well as commercial mortgages, support the guaranteed minimum death benefits annuities and guaranteed minimum income annuities.
Cigna said it will take an after-tax charge of $500 million to cover the gap between the payment to Berkshire and its recorded reserves. It will take the charge in its first-quarter earnings, which it is due to make public on February 7.
The reinsurance deal is nothing unusual for Berkshire, which has done a number of transactions over the years with insurers seeking to rid themselves of a particular book of business.
In April 2011, Berkshire struck a $1.65 billion deal with AIG to take on that insurer's U.S.-based asbestos risk. It did a similar deal with CNA Financial Corp in 2010 and with a Lloyd's of London affiliate in 2006.
For Buffett, the deal is a bet that he can make more money on the upfront fee plus the investment assets than Berkshire will have to pay out over time in policyholder claims.
(Reporting by Caroline Humer and Ben Berkowitz; Editing by Dan Grebler)