Cigna Exiting Run-Off Variable Annuity Business

A Berkshire Hathaway Inc. company has agreed to reinsure Cigna's Corp.'s variable annuity guaranteed minimum death benefits and guaranteed minimum income benefits in which Berkshire will reinsure 100% of Cigna's exposure up to $4 billion on future claims on these businesses, which have been in run-off since 2000.

Under the agreement with Berkshire Hathaway Life Insurance Company of Nebraska, Cigna is paying for the transaction with an incremental $100 million of parent company cash, about $1.8 billion of investment assets supporting the run-off businesses, and a roughly $300 million tax benefit associated with the deal. Cigna will record a charge of $500 million, after tax, in the first quarter, representing the amount of payment to Berkshire that is more than Cigna's recorded reserves. The company's exit of these run-off businesses in its reinsurance segment took effect Feb. 4.

"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 of Cigna Corp. (NYSE: CI), in a statement. "This transaction effectively eliminates potential capital calls and income statement volatility from these run-off books of business.”

During the height of the 2008 financial crisis amid sharply declining and volatile stock markets, U.S. life insurers faced hits to profits in their variable annuity businesses. Factors fueling the problems included lower fee income from managing clients' assets; big charge-offs on the cost of acquiring new business and higher hedging costs. At that time, industry watchers were eyeing whether companies would be forced to boost reserves for these retirement-income products to ensure they could deliver on the guaranteed future payments to policyholders (Best's News Service, Nov. 3, 2008).

Cigna, for example, posted a fourth-quarter 2008 net loss of $209 million as it again was hit by millions in losses on the annuities in its run-off reinsurance business. Cigna, which increased reserves on the variable annuity death benefits, had blamed the losses on declining and volatile equity markets and unfavorable movements in interest rates (Best's News Service, Feb. 5, 2009).

Realized capital gains resulting from the sale of investment assets supporting the business will range between $50 million and $150 million after-tax, depending on whether the assets are sold externally or transferred to other internal portfolios, Cigna said.

Cigna, the fourth-largest publicly traded health insurer by membership, also provides group disability, life and accident coverage. Its fourth-quarter 2012 shareholders' net income rose about 49% to $406 million, despite losses of $68 million related to litigation. Enrollment in Cigna's commercial health care plans, including international, rose to 13.5 million at year end.

Full-year 2012 shareholders' net income increased to $1.6 billion from $1.2 billion as shareholders’ net income in 2011 included losses of $135 million related to the guaranteed minimum income benefits. The 2012 results included pretax charges of $77 million for a realignment plan, and $53 million in costs associated with its acquisition of HealthSpring in 2012.

Consolidated 2012 revenue increased to $29.1 billion, up 33%, reflecting a 38% growth in premiums and fees, driven in part by HealthSpring.

Over the years, life insurers added various features to variable annuities, intended to protect policyholders against downside equity market risk. These included the guaranteed minimum death benefits and living benefits, such as guaranteed minimum income benefits. However, de-risking has been the key word for the industry since 2008. Amid volatile markets, some writers have cut policyholder benefits to reduce their own financial exposure while others have completely exited the market.

Connecticut General Life Insurance Co. currently has a Best's Financial Strength Rating of A (Excellent). Cigna HealthCare companies also currently have a Best's Financial Strength Rating of A (Excellent).

Berkshire Hathaway Life Insurance Co. of Nebraska currently has a Best's Financial Strength Rating of A++ (Superior).

(By Fran Matso Lysiak, senior associate editor, BestWeek: [email protected])