Moody's Investors Service has downgraded the insurance financial strength (IFS) rating of National Indemnity Company (National Indemnity) to Aa1 from Aaa and the long-term issuer rating of its ultimate parent, Berkshire Hathaway Inc. (Berkshire -- NYSE: BRKA),
to Aa2 from Aaa. The rating agency has also downgraded the IFS ratings of Berkshire's other major insurance subsidiaries to Aa1 from Aaa (see list below). 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 capitalization, 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."
Other insurance subsidiaries affected by today's rating action include Berkshire Hathaway Assurance Corporation (BHAC), Columbia Insurance
Company (Columbia), General Reinsurance Corporation (General Re) and Government Employees Insurance Company (GEICO). Historically, Moody's has regarded the intrinsic credit profiles of these companies as somewhat weaker than National Indemnity's. The IFS ratings of these companies have been based on their intrinsic quality combined with implicit and explicit support from National Indemnity and Berkshire. Given that the support providers have been downgraded, the other major insurance units have been downgraded to Aa1 from Aaa as well.
The rating agency noted that Berkshire's rating is well supported at the revised level. The company has several businesses that are relatively
uncorrelated to the general economy and that continue to perform well. These include the diversified utility group under MidAmerican Energy
Holdings Company along with certain manufacturing and service businesses. Berkshire's insurance segment continues to generate healthy underwriting gains -- on average over time -- and the firm is reducing its aggregate exposure to natural catastrophes in light of the reduced capital position at National Indemnity. Other challenges facing the company include the potential for increased credit losses at Clayton Homes, the manufactured housing lender, although the credit performance remains well above industry norms. Berkshire is also exposed to heightened volatility in its earnings and capital base related to market value fluctuations within its large portfolio of equity derivatives.
Moody's cited the following factors that could lead to a further downgrade of Berkshire's revised ratings: (i) additional deterioration in the
stand-alone credit profile(s) of one or more major operating units; (ii) 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%); (iii) losses from insurance underwriting, investments and/or derivatives causing a 20% decline in shareholders' equity in a given year; or (iv) 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: (i) improvement in the stand-alone credit profiles of various operating
units across the major segments; along with (ii) continued holdings of large cash and equivalent balances at the parent company or immediately
available to the parent.
Based in Omaha, Nebraska, Berkshire is a holding company engaged through subsidiaries in diversified businesses that fall into four broad sectors: property & casualty (re)insurance; utilities and energy; manufacturing, service and retailing; and finance and financial products. Berkshire also holds meaningful minority interests in several prominent financial and consumer products firms through its portfolio of common stocks, held mainly by its (re)insurance subsidiaries. Berkshire reported total revenues of $107.8 billion and net income of $5.0 billion for 2008.
Shareholders' equity was $109.3 billion as of December 31, 2008.
The last rating actions on these companies were: (i) assignment of a Aaa senior unsecured debt rating to $1 billion of five-year notes issued by
Berkshire Hathaway Finance Corporation (and guaranteed by Berkshire) on July 30, 2008; (ii) assignment of Aaa IFS ratings to Columbia and BHAC on April 25, 2008; (iii) affirmation of National Indemnity's Aaa IFS rating and Berkshire's Aaa long-term issuer rating on October 20, 2006,
following the announcement of a reinsurance transaction with Equitas; (iv) affirmation of General Re's Aaa IFS rating on December 21, 2005,
along with a change in the rating outlook to stable from negative; and (v) upgrade of GEICO's IFS rating to Aaa from Aa1 on January 28, 1999.
The principal methodologies used in rating Berkshire were Moody's Global Rating Methodology for Reinsurers and Moody's Global Rating Methodology for Property and Casualty Insurers, which can be found at
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.
