Berkshire Hathaway and its key reinsurer see ratings cut

Moody's Investors Service has downgraded the long-term issuer rating of Warren Buffett’s Berkshire Hathaway from Aaa to Aa2 and cut the insurance financial strength rating of its flagship reinsurer National Indemnity from Aaa to Aa1.

Moody’s has also downgraded the IFS ratings of Berkshire's other major insurance subsidiaries to Aa1 from Aaa. Berkshire's Prime-1 short-term issuer rating has been affirmed. The rating outlook for all of these entities is stable.

"Today's rating actions reflect the impact on Berkshire's key businesses of the severe decline in equity markets over the past year as well as the protracted economic recession," said Bruce Ballentine, Moody's lead analyst for Berkshire. For National Indemnity, falling stock prices have reduced its investment portfolio value and, in turn, its capital cushion relative to ongoing insurance and investment exposures. For some of Berkshire's non-insurance businesses, the recession has caused a meaningful drop in earnings and cash flows, particularly for businesses tied to the US housing market, construction, retailing or consumer finance. "These extraordinary market pressures have reduced the excess cushion available from National Indemnity and the other affected operations to support potential funding needs of the parent company," said Mr. Ballentine.

Moody's rating on National Indemnity, Berkshire's flagship reinsurer, has historically reflected its superior capitalisation, which has helped it to attract business and has served as an offset to its relatively high tolerance for underwriting and investment risk. With an investment portfolio marked by a high proportion of common stocks and large concentrations in individual names, National Indemnity's regulatory capital fell by 22% during 2008 (to $27.6 billion as of year-end) and by a significant additional amount through early March 2009. National Indemnity still has a robust capital base, in Moody's view, but it remains exposed to further equity market declines, yielding a credit profile more consistent with the Aa1 rating level.

"Berkshire's long-term issuer rating is a function of the strength of its underlying insurance businesses, led by National Indemnity, as well as the availability of large and diversified cash flows from other owned businesses," said Mr. Ballentine. Several of these non-insurance operations have been negatively affected by the recession. Some reported a drop in earnings during the fourth quarter of 2008 and are susceptible to continued weakness over the next year or two. Mr. Ballentine added, "The downgrade of the parent company rating to Aa2 from Aaa reflects the potential for further declines in the support available from these dual sources."

Moody's cited the following factors that could lead to a further downgrade of Berkshire's revised ratings:

  • additional deterioration in the stand-alone credit profile(s) of one or more major operating units;
  • a shift toward a less conservative financial profile (e.g., adjusted financial leverage, excluding debt of the utilities and energy and the finance and financial products sectors, exceeding 10%);
  • losses from insurance underwriting, investments and/or derivatives causing a 20% decline in shareholders' equity in a given year; or
  • a material decline in operating cash flows and/or cash and equivalents on hand.

Moody's cited the following factors that could lead to a rating upgrade:

  • improvement in the stand-alone credit profiles of various operating units across the major segments;
  • continued holdings of large cash and equivalent balances at the parent company or immediately available to the parent.

Moody's has downgraded the following ratings and assigned a stable outlook:

  • Berkshire Hathaway Inc. -- long-term issuer rating to Aa2 from Aaa;
  • Berkshire Hathaway Assurance Corporation -- insurance financial strength to Aa1 from Aaa;
  • Berkshire Hathaway Finance Corporation -- backed senior unsecured debt to Aa2 from Aaa;
  • Cologne Reinsurance Company -- insurance financial strength to Aa1 from Aaa;
  • Columbia Insurance Company -- insurance financial strength to Aa1 from Aaa;
  • GEICO Corporation -- senior unsecured debt to Aa3 from Aa1;
  • General Re Corporation -- senior unsecured debt to Aa3 from Aa1;
  • General Reinsurance Corporation -- insurance financial strength to Aa1 from Aaa;
  • General Reinsurance UK Limited -- backed insurance financial strength to Aa1 from Aaa;
  • Government Employees Insurance Company -- insurance financial strength to Aa1 from Aaa;
  • National Indemnity Company -- insurance financial strength to Aa1 from Aaa;
  • OBH Inc. -- senior unsecured debt to Aa2 from Aaa;
  • XTRA Finance Corporation -- backed senior unsecured debt to Aa2 from Aaa.
  • Moody's has affirmed the following ratings with a stable outlook:
  • Berkshire Hathaway Inc. -- short-term issuer rating at Prime-1;
  • General Re Corporation -- commercial paper rating at Prime-1.

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