From Weak Hands to Strong Hands

Health insurer Cigna announced today that it is paying Berkshire Hathaway $1.8B to take over a maximum of $4B of future claims that Cigna might owe its policyholders. This is great example of the kind of transaction that few companies other than Berkshire can do and even fewer are willing to do. The ultimate claims that are paid out are likely to be much less than $4B and, in the meantime, Buffett gets to invest the $1.8B at high rates of return.

Note that part of the reason Cigna is doing this transaction is to reduce “income statement volatility.” The company is therefore paying Berkshire good money, reducing the value of Cigna, in part to prevent the company’s earnings from fluctuating too much. And they call Wall Street short-sighted…

Disclosure: Long BRK-B

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