S&P upgrades Berkshire insurance units outlook

S&P Global Ratings has changed the outlook to stable from negative for Berkshire Hathaway's (BRK's) operating insurance subsidiaries, National Indemnity, Government Employees Insurance, General Reinsurance, and other related insurance subsidiaries due to a more robust capital base.

The outlook revision incorporates S&P’s view that the operating insurance subsidiaries will maintain combined capital adequacy that is redundant at the 'AA' confidence level on a prospective basis, and a very strong capital and earnings profile that supports its ratings.

When S&P revised the outlook to negative in September 2017, there was some uncertainty pertaining to the level of capital build-up necessary over the next one-to-two years to offset a material increase in risk exposure owing to significant organic growth, a large amount of retrospective reinsurance, and corresponding growth in loss reserves and invested assets, the ratings agency noted. However, the capital position as of year-end 2017 was better than anticipated based on strong earnings despite underwriting losses in 2017 and large (un)realized capital gains that drove a significant increase in statutory surplus, according to the analysts. As a result, the capital metrics at the insurance companies not only remained in line with S&P’s expectation for the ratings, they also strengthened on a relative basis year-over-year.

Considering exposure to property-catastrophe and long-tail business lines, the large amount of equity holdings, and BRK's acquisitive strategy, BRKIS' capitalization is subject to volatility, the analysts continued. But at the same time, S&P expects earnings accrual to help build up capital to sustain the current level of capitalization.

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