Will Berkshire's Latest Gamble Pay Off?

NEW YORK (TheStreet) -- Warren Buffett's Berkshire Hathaway( BRK.B) recently put down a $1.3 billion wager on a block of Swiss Re's low-return U.S. life reinsurance business.

But while the amount wagered on this business would be quite daunting for most investors, Warren Buffett and Berkshire Hathaway are, of course, in the business of taking risks.

"We just wrote the largest life insurance contract I believe that's ever been written," Buffett told Fox Business in an on-air interview posted on the Web on Jan. 21. "It'll probably have over $50 billion in premium income over the next 40 or 50 years. It's on hundreds of thousands of lives."

The more than $1 billion deal that was announced on Jan. 18 would free up Swiss Re's capital, while possibly resulting in great rewards -- or losses for Berkshire Hathaway. Under the terms of the contract, Swiss Re will, on a 100% quota share basis, reinsure a closed block of yearly renewable term individual life reinsurance business, written prior to 2004, with Berkshire Hathaway Life Insurance Company of Nebraska.

The transaction was effective October 1, 2009, and is scheduled to be reported by Swiss Re in the first quarter of 2010. Swiss Re will receive a ceding commission in the region of CHF 1.3 billion and release CHF 0.3 billion of capital to support the business. Swiss Re will continue to provide administration and reporting services for the subject business.

Swiss Re said it believes the proceeds and capital released by this transaction can be more efficiently employed to achieve a higher return. Meanwhile Swiss Re said it remains committed to the U.S. life reinsurance marketplace as well as to its clients, and, through this transaction, will be in an even stronger position to respond to the rising demand for reinsurance solutions.