Rating agency Moody's has downgraded the insurance financial strength rating of National Indemnity Company to Aa1 from Aaa and the long-term issuer rating of its ultimate parent Berkshire Hathaway to Aa2 from Aaa. The rating agency has also downgraded the ratings of Berkshire's other main insurance subsidiaries to Aa1 from Aaa, including General Re and Geico. 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, in a statement.
Falling stock prices have reduced National Indemnity's investment portfolio value and, in turn, its capital cushion against further 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 Ballentine.
The Moody's rating on National Indemnity, Berkshire's flagship reinsurer, has historically reflected its superior capitalisation, which has helped it to attract business and has served as an offset to its relatively high tolerance for underwriting and investment risk.
National Indemnity's investment portfolio is 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 $27.6bn at year end. The rating agency says capital also fell by a significant additional amount through early March 2009. National Indemnity still has a robust capital base, says Moody's, 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 Ballentine. Several of these non-insurance operations have been hit hard 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, says Moody's.
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 the rating action include Berkshire Hathaway Assurance Corporation, Columbia Insurance Company, General Re and Geico. Moody's has historically regarded the intrinsic credit profiles of these companies as weaker than National Indemnity's. The insurance financial strength 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.