Berkshire Hathaway downgraded by S&P
Berkshire Hathaway (BRK) has become the first high profile victim of Standard & Poor’s recent revision of the methodology it uses to evaluate insurance companies.
The rating agency has downgraded its counterparty credit rating to AA from AA+ but it has affirmed the counterparty credit and financial strength ratings of the group’s core operating insurance companies. The outlook on all ratings is negative.
It said the downgrade was due to concerns over the group’s reliance on its insurance operations for most of its income, despite its strong position in the market. It also mentions its high levels of equity investments and concerns over succession planning in the business.
The changes have come about as a result of changes to the rating agency’s Insurers Rating and Group Rating Methodology, released on May 7, 2013.
“The lower credit rating on BRK better reflects our view of BRK's dependence on its core insurance operations for most of its dividend income," said Standard & Poor's credit analyst John Iten.
S&P points out that Berkshire’s non-insurance business segments generate a majority of its operating income, but aside from the insurance subsidiaries, only Burlington Northern Santa Fe has provided a significant portion of the total dividends paid from the operating companies to the holding company. Its adjusted leverage and coverage metrics are more consistent with those of 'AA' rated issuers rated under our comparable corporate criteria, the rating agency said.
It said the ratings reflect the business’s excellent business risk profile and very strong financial risk profile, built on an extremely strong competitive position and very strong capital and earnings. But these factors are offset to some extent by its “high tolerance for equity investments, which has resulted in volatility” and the capital adequacy of the insurance operations being “less than what we typically expect for the rating category”. Management succession at BRK is also an offsetting factor, S&P said.
The outlook is negative for two reasons, according to the rating agency. One is the sovereign rating cap of 'AA+/Negative', which applies to the obligations of the US government, government-related enterprises and US financial services firms. The second reason is that S&P said it could lower the rating if the capital adequacy according to its capital model of BRK's insurance operations relative to its risk profile deteriorates as a result of a material increase in investment risk exposure or the funding of a large acquisition.
