Cigna Corp., the third-biggest U.S. health insurer, rose to its highest value in at least 30 years after announcing a $2.2 billion deal to shift its death-benefit liabilities to Warren Buffett’s Berkshire Hathaway Inc.
Cigna climbed 3.5 percent to $60.38 at the close in New York, its highest share price since at least April 1982, according to data compiled by Bloomberg. In a statement yesterday, the Bloomfield, Connecticut-based company said it had reached a reinsurance agreement for the variable-annuity death-benefits business it had been trying to exit.
The move should raise demand for Cigna’s shares, said Carl McDonald, a Citigroup Inc. analyst in New York, in a note to clients. The business, closed to new policies for more than a decade, has been a drag on the stock, given the risk in policies whose costs shift based on fluctuating interest rates, he said.
“The deal simplifies the company, and eliminates a business and risk that few investors understood,” McDonald said. “It eliminates the risk of future earnings hits or capital contributions if the reinsurance business performed worse than expected, as has been the case regularly over the last five years.”
Cigna investors have been “waiting on this for a long time,” David Windley, a Jefferies & Co. analyst in Nashville, Tennessee, said in a phone interview.
Berkshire, based in Omaha, Nebraska, agreed to take on as much as $4 billion in liabilities in the arrangement. Cigna is funding the deal with $1.8 billion in investment assets, $100 million in cash and an estimated $300 million tax benefit.
Berkshire rose 1.3 percent to $146,825. The company gained 23 percent in the past 12 months. Cigna advanced 39 percent in that time.
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.
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. 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 he had spent the last 18 months restructuring the benefits business, including moving it to a separate legal entity and setting up hedging strategies to ease volatility.
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.
The company is scheduled to report its fourth-quarter earnings Feb. 7. UnitedHealth Group Inc., of Minnetonka, Minnesota, is the biggest health insurer by market value, followed by Indianapolis-based WellPoint Inc.