Buffett’s Berkshire Hathaway bets on future values of life insurance

Interesting news today as Warren Buffet’s Berkshire Hathaway Inc. entered into a reinsurance agreement with Spanish insurance company VidaCaixa, Sociedad Anónima de Seguros y Reaseguros, a wholly owned subsidiary of Spain’s CaixaBank S.A. We don’t always cover straight reinsurance transactions but in this case it is interesting as this reinsurance agreement see’s Buffet’s Berkshire Hathaway take a bet on the future values of a portfolio of life insurance policies.

From what we can gather, VidaCaixa (the insurance subsidiary of CaixaBank) entered into a reinsurance agreement covering its individual life-risk insurance portfolio with Buffet’s insurance and reinsurance company Berkshire Hathaway Life Insurance Company of Nebraska (“Berkshire Hathaway”) yesterday. The portfolio that has been transferred is made up of all of VidaCaixa’s individual life-risk insurance products underwritten up to the 31st December 2012.

What’s interesting about this life reinsurance agreement is that rather than purely underwriting the portfolio of life policies, Berkshire Hathaway have effectively acquired them by paying VidaCaixa a commission of €600m. So, this reinsurance transaction is more like an embedded value risk transfer, as the life and mortality risks associated with the portfolio has been transferred to Berkshire Hathaway who can benefit from the future values of the portfolio while VidaCaixa gets to realise a fixed value for the portfolio now which they said equates to a €524m capital gain for CaixaBank group.

Under the terms of the reinsurance, or risk transfer, agreement VidaCaixa will continue to service the customers whose policies are included in the life insurance portfolio meaning they will see no changes.

CaixaBank had approached a number of reinsurers on this reinsurance deal since the summer but settled on Berkshire Hathaway. CaixaBank has been hurt by the economic situation in Spain to some extent and the capital they book from the deal will be welcome.

For Berkshire Hathaway, the reinsurance deal see’s them purchase the rights to future cash flows from the book of life business and analysts we’ve spoken with said this is one of the safest bets that could be made on Spain at this time as the life business should provide a stable source of positive cash flows.

It’s interesting how reinsurance can sometimes seems more like securitization, in this case somewhat like embedded value life insurance securitization, without there even being any securities involved.

Update: According to an article just published on Bloomberg the portfolio of life insurance generated premium revenue of €231m last year. If premiums keep up at that rate it is easy to see why Berkshire have entered into this deal.