Rating agency A.M. Best Co. undertook a rating action on a number of subsidiaries of Berkshire Hathaway Inc. (BRK.A) (BRK.B). The rating agency affirmed the financial strength rating (FSR) and issuer credit ratings (:ICR) of A++ and “aaa” respectively of National Indemnity Corporation.
It also affirmed ICR of “bbb-” and debt rating of “bbb-” on Finial Holdings Inc., FSR of A- and ICR of “a-” of Finial Reinsurance Company, and FSR of A++ and ICR of “aa+” of Berkshire Hathaway Life Insurance Company of Nebraska (“BHLN”).
All the ratings are of superior category and carry a stable outlook.
A.M. Best backed its rating affirmation on National Indemnity on its solid operating performance, strong capital position and niche market presence. It also takes into account the substantial contribution of the subsidiary to the consolidated company’s revenue.
The subsidiary’s highly talented and focused underwriting team along with good investment management by Warren Buffett makes it possible for the unit to deliver favorable operating results consistently. The rating agency also has a favorable view of the unit’s ability to maintain strong risk adjusted capital levels despite significant cat loss activity in 2011.
However, the above-mentioned positives are offset by an above-average equity concentration in the company’s investment portfolio, which exposes income from investment to market volatility.
Moreover, speculations surrounding Buffett’s succession plans might have an adverse effect on the ratings, not only for National Indemnity but also for other units as well.
Despite the stable outlook, National Indemnity could see a rating downgrade if its earnings get hit by cat losses or investment losses, thereby causing loss of capital.
As for BHLN, the rating agency takes into account the unit’s adequate risk-based capitalization, favorable operating earnings and the direct and indirect benefits of being a part of a huge company. However, factors offsetting these positives include the unit’s exposure to below investment grade assets, and high investment in an affiliated non-insurance common stock. The agency may downgrade BHLN if its operating results or capital level suffers.
We do not see any material reason that may cause any rating downgrade for the subsidiaries in the near term. The holding company is doing well and the subsidiaries are likely to benefit as well.
We thus maintain our Outperform recommendation on the shares of Berkshire Hathaway. However, the stock retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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