Best Affirms Ratings of National Indemnity, Other Berkshire Hathaway Units

May 23, 2014

A.M. Best has affirmed the financial strength rating (FSR) of ‘A++’ (Superior) and issuer credit ratings (ICR) of “aaa” of National Indemnity Company and its affiliates, and the FSR of ‘A’- (Excellent) and ICR of “a-” of Finial Reinsurance Co., based in Stamford, Connecticut, as well as the ICR of “bbb-” and the debt rating of “bbb-” of Delaware-based Finial Holdings Inc.

Best also affirmed the FSR of ‘A++’ (Superior) and ICR of “aa+” of Berkshire Hathaway Life Insurance Company of Nebraska (BHLN) and the FSR of A+ (Superior) and ICR of “aa-” of First Berkshire Hathaway Life Insurance Co. (FBHL), based in New York.

All of the companies are subsidiaries of Berkshire Hathaway Inc. The outlook for all of the ratings is stable.

Best said its affirmation for the ratings of National Indemnity reflects the insurer’s “consistently superior operating performance, historically strong risk-adjusted capitalization and global market profile.” The ratings agency also said National Indemnity’s management team is “adept at dealing with the underwriting cycle and has the financial resources and acumen necessary to take advantage of unique opportunities.”

Best said it “believes that this distinctive aspect and its superior market profile provide National Indemnity with the ability to outperform the market in terms of underwriting performance. Furthermore, National Indemnity’s operating performance is enhanced by the investment returns generated by the strategies of its chief executive officer (CEO) Mr. Warren Buffett, whose investment expertise is heavily relied upon to bolster the total returns of the organization.

“National Indemnity’s risk-based capitalization remains consistently at the superior level. Historically, the company has managed its aggregate risk accumulations conservatively, and as a result, its risk-based capitalization has continued to remain in the superior range, even after being tested by a series of severe shock losses.”

As a partial offsetting factor Best cited National Indemnity’s exposure to “higher levels of equity investments as compared to most of its peers. These higher levels of equity investments can result in volatile results;” however, Best added that its “concern is somewhat mitigated by National Indemnity’s investment portfolio’s superior long-term performance.”

In addition Best noted the “importance of Mr. Buffett (as CEO) to the entire Berkshire organization and the lack of transparency with regard to his successor continue to pose a risk to the organization,”which Best indicated it is concerned about.

The report said that although Best believes there are “very strong internal candidates to succeed Mr. Buffett, the lack of clarity in regards to a chosen successor adds a degree of uncertainty to the future direction of the corporation, as Mr. Buffett personally controls the capital allocation within the firm.”

Best nevertheless indicated that it “believes Berkshire’s corporate strategy, culture and decentralized operating structure will facilitate a successful transition in management when it occurs.”

In the conclusion of its analysis of National Indemnity’s ratings Best said they “could experience negative rating actions if large catastrophic losses in combination with large investment losses decrease its risk-based capitalization” below best’s expectations, and/or the company experiences a series of operating losses over several years that exceed  Best’s expectations.

“The ratings of BHLN recognize its adequate level of risk-adjusted capitalization, recent increased transaction activity and the implicit and explicit benefits of being part of the Berkshire organization,” said the report. As partial offsetting factors Best noted “BHLN’s underperforming block of mortality business and its heavy concentration in an affiliated non-insurance common stock investments.

“Positive rating movements for BHLN are unlikely. Key rating drivers that may lead to negative rating actions include a material deterioration in its operating performance, lack of capital support from the parent, decreased importance within National Indemnity and/or substantial deterioration in risk-adjusted capitalization as measured by Best’s Capital Adequacy Ratio (BCAR).

The FSR of ‘A++’ (Superior) and ICRs of “aaa” have been affirmed for National Indemnity Company and its following affiliates:

Columbia Insurance Company

National Fire & Marine Insurance Company

National Liability & Fire Insurance Company

National Indemnity Company of Mid-America

National Indemnity Company of the South

Berkshire Hathaway Specialty Insurance Company

The following debt rating has been affirmed:

Finial Holdings, Inc.—

– “bbb-” on $200 million 7.125% senior unsecured notes, due 2023

Source: A.M. Best

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