Cigna Corporation (NYSE: CI) today announced a definitive agreement with Berkshire Hathaway Life Insurance Company of Nebraska, a member of the Berkshire Hathaway, Inc. group (Berkshire), under which Berkshire will reinsure Cigna's Run-off Guaranteed Minimum Death Benefits (VADBe) and Guaranteed Minimum Income Benefits (GMIB) businesses effective February 4, 2013. Cigna will fund this transaction with an incremental $100 million of parent company cash, approximately $1.8 billion of investment assets supporting the run-off businesses, and an estimated $300 million tax benefit associated with the transaction.
Berkshire will assume 100% of Cigna's exposure up to $4 billion of future VADBe and GMIB claims, which is significantly in excess of current projections of future claims for this business. Cigna believes that the potential for actual claims to exceed the limit of the coverage from Berkshire is extremely remote.
“Cigna is taking this definitive strategic step to further reduce risk and continue to improve our financial flexibility,” said David M. Cordani, President and Chief Executive Officer. “This transaction effectively eliminates potential capital calls and income statement volatility from these run-off books of business.”
Cigna expects to record the exit transaction as a special item in the first quarter of 2013, resulting in an after-tax charge of $500 million. The charge represents the amount of payment to Berkshire that is in excess of Cigna's recorded reserves. Realized capital gains resulting from the sale of investment assets supporting the business are expected to range between $50 million and $150 million after-tax, depending on whether the assets are sold externally or transferred to other internal portfolios.
The special item charge for the exit transaction and the expected realized capital gains on the sale of assets will be included in Cigna's net income, but will not be included in adjusted income from operations. As a result, Cigna's earnings outlook for 2013, which is based on adjusted income from operations, will not be impacted by this transaction. The transaction also does not affect Cigna's outlook regarding capital that is available for deployment in 2013.