By Andrea Tse 01/26/10 - 12:24 AM EST
NEW YORK (TheStreet) -- Warren Buffett's Berkshire Hathaway( BRK.B Quote) recently put down a $1.3 billion wager on a block of Swiss Re's low-return U.S. life reinsurance business.
But while the amount wagered on this business would be quite daunting for most investors, Warren Buffett and Berkshire Hathaway are, of course, in the business of taking risks.
"We just wrote the largest life insurance contract I believe that's ever been written," Buffett told Fox Business in an on-air interview posted on the Web on Jan. 21. "It'll probably have over $50 billion in premium income over the next 40 or 50 years. It's on hundreds of thousands of lives."
The more than $1 billion deal that was announced on Jan. 18 would free up Swiss Re's capital, while possibly resulting in great rewards -- or losses for Berkshire Hathaway. Under the terms of the contract, Swiss Re will, on a 100% quota share basis, reinsure a closed block of yearly renewable term individual life reinsurance business, written prior to 2004, with Berkshire Hathaway Life Insurance Company of Nebraska.
The transaction was effective October 1, 2009, and is scheduled to be reported by Swiss Re in the first quarter of 2010. Swiss Re will receive a ceding commission in the region of CHF 1.3 billion and release CHF 0.3 billion of capital to support the business. Swiss Re will continue to provide administration and reporting services for the subject business.
Swiss Re said it believes the proceeds and capital released by this transaction can be more efficiently employed to achieve a higher return. Meanwhile Swiss Re said it remains committed to the U.S. life reinsurance marketplace as well as to its clients, and, through this transaction, will be in an even stronger position to respond to the rising demand for reinsurance solutions."This is a significant step forward in Swiss Re's strategy to increase capital efficiency," Christian Mumenthaler, Swiss Re's head of life & health, said. "By transferring this block of life business, Swiss Re is monetizing intangible assets and freeing up capital. The transaction puts us in an excellent position to redeploy the capital at more attractive returns."
Buffett said that Swiss Re was reinsured at Berkshire Hathaway Life. Following the deal, Berkshire could be liable for up to $1.5 billion in claims, a cap that Swiss Re said will unlikely be reached in our lifetime.
In true Buffett form, Buffett on the surface appears to be taking quite a cheery attitude towards his latest gamble, laughing as he told Fox Business that "the premiums could end up being over $50 billion eventually; we just hope that the losses aren't over $60 billion."
This announcement was made two days before Berkshire Hathaway shareholders approved a 50-for-1 split of Berkshire Class B shares. The move was made to support the acquisition of railroad company Burlington Northern Santa Fe(BNI Quote).All of which begs the question: Is Buffett taking too big of a gamble regarding the Swiss Re bet?
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