Wednesday, ratings agency Moody's downgraded the credit rating for billionaire Warren Buffett's Berkshire Hathaway Inc. (BRKa) and several of its insurance subsidiaries. The long-term issuer rating of Berkshire Hathaway was lowered to Aa2 from Aaa, while the Insurance Financial Strength or IFS rating of National Indemnity Co., a subsidiary of Berkshire and its flagship reinsurer, was downgraded to Aa1 from Aaa. The senior unsecured debt of GEICO Corp. and General Re Corp. was lowered to Aa3 from Aa1.
The agency attributed the ratings changes to two factors - the impact of the decline in equity markets in the past year on the major businesses of Berkshire and secondly the protracted economic recession. Berkshire's Prime-1 short-term issuer rating has been affirmed. The rating outlook is stable.
The rating agency also downgraded the IFS ratings of Berkshire's several other major insurance subsidiaries, including Berkshire Hathaway Assurance Corp., Cologne Reinsurance Co., Columbia Insurance Co. and General Reinsurance Corp. and Government Employees Insurance Co., to Aa1 from Aaa.
Last month, Standard & Poor's Ratings Services lowered its ratings outlook on Berkshire, its finance unit Berkshire Hathaway Finance Corp., and its core insurance companies, including Berkshire Hathaway Assurance Corp., to negative from stable. S&P cited the reduction in the company's insurance operations capital caused by stock market declines as reason for the revised outlook.
In March, Fitch also downgraded Berkshire Hathaway's Issuer Default Rating to AA+ from AAA and senior unsecured debt ratings to AA from AAA, while affirming its AAA IFS ratings on the company's insurance and reinsurance subsidiaries. The rating outlook for all entities was Negative. Fitch attributed the downgrade to concerns about the potential for losses on the insurer's equity and derivatives holdings.
Moody's noted Wednesday that falling stock prices have reduced National Indemnity's investment portfolio value and, subsequently its capital cushion relative to ongoing insurance and investment exposures. For some of Berkshire's non-insurance businesses, particularly those tied to the U.S. housing market, construction, retailing or consumer finance, the recession has caused a sharp drop in earnings and cash flows.
National Indemnity's regulatory capital dropped 22% during 2008 to $27.6 billion as of year-end, and significantly further through early March 2009. Moody's feels that National Indemnity still has a robust capital base, but it remains exposed to further equity market declines, yielding a credit profile more consistent with the Aa1 rating level.
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.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 Bruce Ballentine, Moody's lead analyst for Berkshire.
Several of these non-insurance operations have been hurt by the recession. Some reported a drop in earnings during the fourth quarter of 2008 and are susceptible to continued weakness over the next one or two years. Moody's said the downgrade of the parent company rating reflects the potential for further declines in the support available from these dual sources.
The other insurance subsidiaries that were assigned a lowered rating have traditionally been considered by Moody's as having weaker intrinsic credit profiles, compared to National Indemnity. The IFS ratings of these companies have been based on their intrinsic quality combined with support from National Indemnity and Berkshire. Since the support providers have been downgraded, the other major insurance units also were downgraded.
Berkshire owns companies operating in sectors as varied as insurance, utility, furniture, restaurants, carpet and jewelry. It also has interests in Coca-Cola Co., Wells Fargo & Co. and Kraft Foods Inc. It has a sizeable stake in Moody's too.
Moody's noted that Berkshire's rating is well supported at the revised level and that the company has several businesses such as MidAmerican Energy Holdings Co. that are relatively unharmed by the vagaries of the market turmoil. Berkshire's insurance segment continues to generate healthy underwriting gains and is also reducing its aggregate exposure to natural catastrophes.
According to the ratings agency, other challenges facing Berkshire include the potential for increased credit losses at Clayton Homes. The company is also exposed to heightened volatility in its earnings and capital base related to market value fluctuations within its large portfolio of equity derivatives.
Berkshire recently reported about 96% drop in fourth-quarter profit and earnings for 2008 declined 62% from last year.
While announcing the results in March, Buffett, an investment guru, had admitted, During 2008 I did some dumb things in investments. I made at least one major mistake of commission and several lesser ones that also hurt... Furthermore, I made some errors of omission, sucking my thumb when new facts came in that should have caused me to re-examine my thinking and promptly take action.''
BRKa closed Wednesday's regular trade at $88,960.00, down $40.00 or 0.04%.
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