CIGNA Sheds Run-Off Biz - Analyst Blog

By Zacks | February 05, 2013 AAA

In an effort to reduce risk and strengthen financial flexibility the U.S. health insurer CIGNA Corp. (CI), has announced it will shed its Run-off Reinsurance Segment.
    
To this effect, Cigna has entered into an agreement with Berkshire Hathaway Life Insurance Company of Nebraska, one of the companies of Berkshire Hathaway, Inc. (BRK.A), (BRK.B).

Per the contract, Cigna arranged reinsurance cover for any future liabilities arising from its Run off business, from February 4, 2013. Berkshire has assumed responsibility for future claims up to $4 billion.

Berkshire has also entered into similar deals earlier for CNA Financial Corp. (CNA), and American International Group, Inc. (AIG), to name a few.

Cigna's Run-off Reinsurance Segment had been discontinued and is now an inactive business in the run-off mode since the sale of the U.S. individual life, group life and accidental death reinsurance business in 2000. This segment predominantly comprised of guaranteed minimum death benefit (GMDB, also known as VADBe), guaranteed minimum income benefit (GMIB), workers' compensation and personal accident reinsurance products.

The transaction will cost Cigna $2.2 billion and will be funded by $100 million in cash, approximately $1.8 billion of investment assets in run-off businesses, and an estimated $300 million tax benefit associated with the transaction.

Cigna is expected to incur an after-tax charge of $500 million, in the first quarter 2013 in relation to this transaction.

Following the deal, rating agency Fitch Ratings gave its favorable view on the transaction. It acknowledged that the step will reduce Cigna's exposure to involuntary forces (interest rates) that have over the past many years induced volatility to its bottom-line earnings. The rating agency thus affirmed the parent's 'BBB+' Issuer Default Rating (IDR) and 'BBB' unsecured senior debt ratings. Fitch also backed the Insurer Financial Strength (IFS) ratings of various Cigna subsidiaries at 'A'. All the ratings have been given a stable outlook.

With this transaction, Cigna has unburdened one of its significant liabilities and now will be able to focus on more important aspects of its business. The company is readying itself for the changing landscape of the health insurance industry. International expansion also remains its high priority.  Cigna presently carries a Zacks Rank #3 (Hold).

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