Warren Buffett's Berkshire Hathaway will take on some risk that a cautious Swiss Re doesn't want right now, in a deal strengthening ties between the two companies.
According to a Swiss Re news releasetoday, the firm will "transfer risk from (a) closed block of U.S. individual life reinsurance business to Berkshire Hathaway in order to redeploy capital at more attractive returns."
While Swiss Re will "continue to provide administration and reporting services for the subject business," the transfer of risk will free up about $293 million of the firm's capital.
Reuters reports Berkshire will pay Swiss Re $1.27 billion for the contracts. Berkshire will then receive the premiums generated by the contracts. The income stream can be used for investments, but Berkshire also becomes responsible for "paying up to $1.5 billion in potential claims."
Swiss Re reduces its "financial exposure to lethal pandemics such as the swine flu outbreak by about 10 percent," says Reuters.
Bloomberg says Swiss Re CFO George Quinn told a conference call, "This is clearly not a game-changing transaction for us... There is a net cash flow to them, but that ignores the fact that we are also transferring a very large chunk of liabilities."
It also isn't a major move for Berkshire. Justin Fuller writes today on Buffettologist.com the "deal really won’t move the needle much for Berkshire, but it does give it additional exposure to the life insurance market as well as more premiums to invest over time."
It's been almost a year since Berkshire bought a 3 percent stake in Swiss Re for about $800 million and received 20 percent of its property/casualty business for the following five years.