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Fitch Ratings has revised the Rating Outlook to Negative from Stable on the ‘AAA’ long-term issuer and unsecured senior debt ratings of Berkshire Hathaway Inc. (Berkshire) and its wholly-owned subsidiary GEICO Corporation (GEICO).
GEICO’s debt ratings are based on the implicit support of its parent and move in unison with those of Berkshire. The insurer financial strength (IFS) ratings of various insurance and reinsurance subsidiaries of Berkshire and GEICO have been affirmed at ‘AAA’ with a Stable Outlook by Fitch.
Berkshire’s ‘AAA’ ratings are based primarily on Berkshire’s exceptionally strong capitalization, as well as its diversified sources of earnings, substantial financial flexibility, and the strong operating performance of its primary insurance and non-insurance subsidiaries. The movement to a Negative Rating Outlook is driven by Fitch’s view on the very high level of ‘key person risk’ at Berkshire, which is placing increasing pressure on its ratings, and, to a lesser extent, Berkshire’s increased use of debt to fund finance subsidiaries.
Berkshire has an outstanding long-term success record that Fitch attributes in great part to the talents of Berkshire’s Chairman, Warren E. Buffett. Buffett’s reputation with shareholders allows the company to adopt strategies and accumulate capital in ways that would generally not be accepted at other public companies. Such unique attributes include Berkshire’s historic concentrated investments in a limited number of equity securities and its current maintenance of a $40 billion cash position.
Although the 74-year-old Buffett is reportedly in good health and has expressed no intention of retiring, Fitch does not believe that Buffett’s talents can be easily replaced, or that Berkshire’s current strategies would be sustainable in his absence.
Thus, Fitch believes it is unlikely that Berkshire would be able to operate with the attributes that have historically allowed it to achieve ‘AAA’ ratings after the inevitable departure of Buffett. Berkshire has not made its succession plans public, nor has it indicated if its operational, investment, acquisition, or capital strategies would change under the next generation of management.
Fitch’s ratings of Berkshire also consider current investigations by the New York Attorney General’s Office and the SEC into nontraditional or loss mitigation insurance products (commonly called finite risk reinsurance) sold by Berkshire’s insurance subsidiaries.
While Fitch does not currently expect the outcome of these investigations to result in any material decline in Berkshire’s capital position, Fitch does believe Berkshire’s General Reinsurance subsidiary may have suffered some reputation damage due to its involvement in several transactions. Furthermore, Fitch believes the investigations, which included the questioning of Mr. Buffett’s possible role in a loss portfolio transfer arrangement with American International Group, further highlights the key person risk at Berkshire. Regulators have stated publicly that Buffett is not a target of their investigations.
Berkshire continues to expand the manufactured housing lending operation of its Clayton Homes subsidiary. This expansion was financed through bonds issued by Berkshire Hathaway Finance Corporation that are guaranteed by Berkshire. The ratio of debt (either issued or guaranteed by Berkshire) to total capital now stands at 10% on a pro forma basis, after adjusting for the new debt issued in January. This represents the upper boundary for Fitch’s ‘AAA’ rating. Furthermore, Fitch has no expectation that this represents a temporary spike in leverage.
The ratings also consider Berkshire’s catastrophe excess of loss exposures, as well as Berkshire’s appetite for acquisitions.
Berkshire’s insurance subsidiaries continued to post good results in 2004 following strong results in 2003. Berkshire reported an underwriting profit of $1.55 billion in 2004 in spite of $1.25 billion of losses resulting from the 2004 hurricane season. Overall, Berkshire reported net income of $7.3 billion in 2004 compared with $8.2 billion in 2003. Fixed-charge coverage also remains strong at 9.4 times, including interest expense from Berkshire’s finance subsidiaries. Berkshire’s debt-to-total capital ratio at Dec. 31, 2004, excluding finance-related debt, was 3.9%. The ratio of debt issued or guaranteed by Berkshire to total capital was 6.6% at Dec. 31, 2004 but rises to 10.2% with the effect of $3.75 billion of new guaranteed debt issued on Jan. 4, 2005.
Berkshire’s capitalization, in absolute dollars, is exceptional. As of Dec. 31, 2004, Berkshire reported GAAP equity of $85.9 billion. On a risk-adjusted basis, insurance subsidiary capital meets Fitch’s ‘AAA’ standard.
Berkshire and its subsidiaries engage in both primary insurance and reinsurance of property and casualty risks, as well as a number of businesses in the apparel, building products, energy, financial products, aviation services, distribution, and retail business sectors. Berkshire’s principal insurance businesses include: GEICO, General Reinsurance Corp., Berkshire Hathaway Reinsurance Group, and Berkshire Hathaway Primary Insurance Group.
Fitch also assigned an ‘AAA’ rating to $3.75 billion of senior notes issued by Berkshire’s subsidiary, Berkshire Hathaway Finance Corporation, that is guaranteed by Berkshire, and an ‘AAA’ IFS rating to several members of the General Re group.
Fitch has affirmed and revised the Rating Outlook to Negative from Stable on the following ratings:
Berkshire Hathaway Inc.
–Long-term issuer ‘AAA’;
–$700 million senior notes 3.40% due July 2, 2007 ‘AAA’;
–$1.049 billion senior notes 3.375% due Oct. 15, 2008 ‘AAA’;
–$500 million senior notes 4.20% due Dec. 15, 2010 ‘AAA’;
–$729 million senior notes 4.625% due Oct. 15, 2013 ‘AAA’;
–$400 million senior notes 5.10% due July 15, 2014 ‘AAA’.
GEICO Corporation
–Long-term issuer ‘AAA’;
–$100 million senior notes 7.50% due April 15, 2005 ‘AAA’;
–$150 million senior notes 7.40% due July 15, 2023 ‘AAA’.
Fitch also assigns the following new ratings:
Berkshire Hathaway Inc.
–$1.25 billion floating rate senior notes due Jan. 11, 2008 ‘AAA’;
–$1.5 billion senior notes 4.125% due Jan. 15, 2010 ‘AAA’;
–$1 billion senior notes 4.85% due Jan. 15, 2015 ‘AAA’.
The following ratings have been affirmed with a Stable Rating Outlook
by Fitch:
General Re Corporation
–Long-term issuer ‘AA+’;
–$150 million senior debentures 9.00% due Sept. 12, 2009 ‘AA+’;
–$3,400 million commercial paper program ‘F1+’.
Fitch also affirms the following IFS ratings at ‘AAA’:
Columbia Insurance Company
General Reinsurance Corp.
Government Employees Insurance Company
National Fire and Marine Insurance Co.
National Indemnity Company
National Indemnity of Mid America
National Indemnity of the South
National Liability and Fire Insurance Co.
Wesco-Financial Insurance Company
Fitch also assigns ‘AAA’ IFS ratings to the following:
General Star Indemnity
General Star National Insurance Co.
Genesis Insurance Co.
Genesis Indemnity Insurance Company
National Reinsurance Corporation
Fairfield Insurance Co.