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08 Apr 2009
New York, April 08, 2009 -- 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
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,
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
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 www.moodys.com in the Credit Policy & Methodologies
directory, in the Rating Methodologies subdirectory. Other
methodologies and factors that may have been considered in the process
of rating this issuer can also be found in the Credit Policy & Methodologies
Moody's has downgraded the following ratings and assigned a stable
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
Columbia Insurance Company -- insurance financial strength to Aa1
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
OBH Inc. -- senior unsecured debt to Aa2 from Aaa;
XTRA Finance Corporation -- backed senior unsecured debt to Aa2 from
Moody's has affirmed the following ratings with a stable outlook:
Berkshire Hathaway Inc. -- short-term issuer rating
General Re Corporation -- commercial paper rating at Prime-1.
Moody's insurance financial strength ratings are opinions of the ability
of insurance companies to punctually pay senior policyholder claims and
obligations. For more information, please visit our website
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service
Moody's downgrades Nat'l Indemnity to Aa1, Berkshire Hathaway to Aa2
Financial Institutions Group
Moody's Investors Service
No Related Data.
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