A.M. Best Affirms Rating of National Indemnity Group

August 20, 2002

A.M. Best Co. has affirmed the group financial strength rating of A++ (Superior) of National Indemnity Group (NIG).

The rating reflects the group’s extraordinary capitalization and balance sheet liquidity, superior earnings fundamentals, recognized leadership position in the global insurance and reinsurance market, as well as the considerable financial flexibility afforded it through affiliation with its parent, Berkshire Hathaway Inc.

The strengths afford NIG significant underwriting capacity, unsurpassed claims paying ability and the operating flexibility to respond opportunistically to new and emerging market risks. Management’s conservative risk strategy enables NIG to absorb significant adversity while maintaining ample capacity to support its ongoing business plan. This was clearly demonstrated by the events of Sept. 11, 2001, from which the group incurred a net loss of less than 4 percent of reported statutory surplus.

Although NIG writes “super cat” and special risk insurance coverage, including terrorism coverage, its largest per occurrence catastrophe exposure is manageable, at less than 15 percent of statutory surplus due to its disciplined underwriting approach. It has also demonstrated the underwriting expertise to achieve favorable operating returns over the long term despite intermittent volatility in underwriting performance stemming from high severity losses and losses relating to large non-traditional reinsurance covers. On an economic basis, NIG has generated excellent total returns on equity, averaging 11.0 percent over the past 10 years, benefiting from significant investment “float” generated by long-term reinsurance contracts.

Modestly offsetting these positive factors is NIG’s considerable common stock leverage, which is concentrated in a limited number of large U.S. corporations and a reported decline in statutory surplus for 2001. In 2001, the group suffered a decline in reported statutory surplus due largely to a change in accounting, which resulted in recording a significant deferred tax liability. Although this was the single most significant factor contributing to NIG’s reported decline in statutory surplus, it continues to maintain a superior level of capitalization.

Moreover, over the past several years due to continued weakness in global capital markets, the group’s surplus has been negatively impacted by a significant decline in unrealized capital gains. However, management’s long-standing investment philosophy has been to maximize its average annual rate of return through a buy and hold strategy of a limited number of diversified well-developed and stable companies. This investment approach has produced almost $9.0 billion of realized capital gains since 1997, contributing to NIG’s robust level of statutory surplus.

A.M. Best believes NIG could currently withstand the compound effect of a mega-catastrophe and a moderate devaluation in its current invested asset base and still maintain an excellent overall financial strength. Accordingly, the group’s rating outlook is stable.

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