Swiss Re has announced the closing of a U.S. individual life retrocession transaction with Berkshire Hathaway.  The transaction transfers the risk associated with a block of yearly renewable term individual life insurance contracts written prior to 2004 to a Berkshire Hathaway subsidiary in exchange for CHF 1.3 billion ($1.27 billion).

According to coverage of the transaction in the Wall Street Journal, Swiss Re was motivated by the prospect of freeing up about CHF 300 million of capital that the company hopes will be used to underwrite more profitable business.  The life insurance block transferred to Berkshire Hathaway failed to meet Swiss Re’s goal of a 14% yield on invested capital:

Christian Mumenthaler, Swiss Re’s Head of Life & Health, said: “This is a significant step forward in Swiss Re’s strategy to increase capital efficiency. By transferring this block of life business, Swiss Re is monetising intangible assets and freeing up capital. The transaction puts us in an excellent position to redeploy the capital at more attractive returns.”

Apparently Berkshire Hathaway believes that the underwriting results and returns generated by investing policyholder float will be acceptable.

As we discussed recently, Berkshire Hathaway owns a 3% stake in Swiss Re and the two companies have entered into a number of reinsurance transactions over the past several years.  In addition, Berkshire provided Swiss Re with a CHF 3.6 billion loan that analysts believe Swiss Re may be planning to repay by the middle of this year.

The author owns shares of Berkshire Hathaway.