Speaking of downgrade Friday,
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.
…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.
Related links:
Another sacred cow, slain – FT Alphaville
Worst year for Buffett’s Berkshire – FT
For Buffett, yesterday’s fans are today’s snarky critics – FT Alphaville
Derivatives and the wisdom of the Sage – FT Alphaville