Ratings Recap: Berkshire H. (Notes), AXA US, Chartis PR, AGCS Marine

January 12, 2010

Standard & Poor’s Ratings Services has assigned its ‘AAA’ senior debt rating to Berkshire Hathaway Finance Corp.’s (BHFC) $1.0 billion senior notes. The notes will have various maturity dates. At the same time, S&P placed the ‘AAA’ rating on these notes on CreditWatch with negative implications. “The assigned rating is based on the ratings on Berkshire Hathaway Inc. [BRK; AAA/Watch Neg/A-1+], BHFC’s ultimate parent, reflecting BRK’s extremely strong competitive position, experienced and focused management team, very strong insurance and reinsurance capitalization, and extremely strong financial flexibility,” explained credit analyst John Iten. “Weaknesses to the rating include exposure to severe natural catastrophe losses, high common stock exposure, and the significant amount of long-term claims payments assumed through retroactive reinsurance covers by National Indemnity Co., a BRK subsidiary.” A longer-term concern is whether BRK will maintain its culture and risk profile following a management change, though we expect no such change anytime soon. Iten added that “BRK fully guarantees BHFC’s new note issuance. BHFC will use the net proceeds of this issuance to help repay $1.5 billion of notes maturing on Jan. 15, 2010.” In addition S&P noted that “BHFC’s borrowings are used to fund the finance operations of Vanderbilt Mortgage & Finance Inc., a wholly owned subsidiary of Clayton Homes Inc. Clayton is a vertically integrated manufactured housing company.” On Nov. 4, 2009, S&P placed its ratings on BRK and various affiliates on CreditWatch with negative implications following the company’s announcement that it will acquire Burlington Northern Santa Fe Corp. (BNSF). The transaction is valued at approximately $44 billion, including the assumption of approximately $10 billion of BNSF debt, making it BRK’s largest acquisition to date. BRK already owns nearly 23 percent of the stock of BNSF. BRK will finance the acquisition of the remaining shares with a combination of 60 percent cash and 40 percent through the issuance of new BRK shares totaling approximately $26.6 billion. S&P said it “expects that a significant part of the cash portion will come from BRK’s core insurance operations, as has historically been the case in other transactions.” Te rating agency also said it believes that this transaction “will decrease the liquidity and capital adequacy of the insurance operations. For the consolidated organization, financial leverage will increase and fixed-charge coverage could decline. These considerations support the CreditWatch negative.”

Standard & Poor’s Ratings Services published a statement detailing corrections it has made to an “administrative error related to the outlook on AXA Insurance Co., a U.S. subsidiary of France-based global multiline insurance group AXA (counterparty credit and insurance financial strength ratings on core operating entities, AA/Negative/–).” S&P explained that on Feb. 19, 2009, it revised its outlook to negative from stable on AXA. “The outlook change was intended to cover AXA’s core operating entities. However, due to a database entry error, the outlook on U.S. subsidiary Axa Insurance Co. was not revised to negative. The database entry error has been modified, and the outlook on Axa Insurance Co. is now negative.”

Standard & Poor’s Ratings Services has withdrawn its ‘A+’ financial strength rating on Chartis International Insurance Co. of Puerto Rico (Chartis PR). “National Union Fire Insurance Co. of Pittsburgh, PA, which is an affiliate of Chartis PR, terminated its guarantee of Chartis PR’s debt effective Dec. 31, 2009,” the bulletin explained. Following this termination, Chartis PR requested that S&P withdraw the rating.

A.M. Best Co. has upgraded the financial strength rating to ‘A+’ (Superior) from ‘A’ (Excellent) and issuer credit rating to “aa” from “a” of Chicago-based AGCS Marine Insurance Company, a wholly owned subsidiary of Allianz Global Risks US Insurance Company. The outlook for both ratings is stable. Best said the rating actions “reflect a change in the organizational structure of AGCS Marine, which on January 1, 2010, became a subsidiary of Allianz US through a stock dividend from Fireman’s Fund Insurance Company.” Best added that the ratings reflect its view that AGCS Marine is an integral part of the strategy of its ultimate parent company, Allianz Societas Europaea (Allianz SE). Allianz SE provides explicit support to Allianz US and its group members. “Other rating factors include the North American consolidated group’s strong risk-adjusted capitalization, solid business franchise, improved underwriting and operating performance in recent years and anticipated earnings diversification.” However, Best also indicated that “the historically poor underwriting performance and the inherent risks associated with the recent growth in premium production,” constitute offsetting factors. Best indicated that the outlook recognizes its view that “continued support from Allianz SE, along with improved underwriting processes and risk mitigation initiatives, will allow the group to generate strong sustainable operating returns.”

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