Ratings: Berkshire Hathaway/Lubrizol; First Mercury, Mennonite

March 21, 2011

Standard & Poor’s Ratings Services has stated that the ratings on “Berkshire Hathaway Inc. (BRK; AA+/Stable/A-1+) and its insurance subsidiaries are unaffected by BRK’s announcement that it has agreed to acquire specialty chemical manufacturer Lubrizol Corp. in a cash transaction,” valued at $9.7 billion, which is expected to close in the third quarter of 2011. “Based on our understanding of the structure and financing of this acquisition, we believe that BRK will still meet our recently published expectations for 2011 following this transaction,” said S&P. “Most significantly, we believe that insurance capital adequacy remains on track to improve to the ‘AA’ level by year-end 2011. However, this transaction significantly reduces the projected capital redundancy from our prior estimate. Moreover, our projection assumes that the equity markets will not experience a major decline from their levels as of March 11 and that the company will make no additional acquisitions of a material size for the rest of the year.” S&P added that it could consider lowering its ratings “to the extent that the company does not meet our expectations for insurance capital adequacy, earnings, and other aspects of performance (see “Berkshire Hathaway Inc.” and “Berkshire Hathaway Inc.’s Insurance And Reinsurance Companies,” both published on March 4, 2011).”

A.M. Best Co. has upgraded the financial strength rating (FSR) to ‘A’ (Excellent) from ‘A-‘ (Excellent) and the issuer credit ratings (ICR) to “a” from “a-” for First Mercury Group and its pool members and reinsured affiliates. Best has also removed the ratings from under review with positive implications and assigned a stable outlook. The rating actions “follow the February 9, 2011 closing of the sale of First Mercury Financial Corporation, the previous ultimate parent of the group members, to Crum & Forster Holdings Corp., a downstream holding company whose ultimate parent is Fairfax Financial Holdings Limited,” Best explained. The ratings reflect First Mercury’s “adequate risk-adjusted capitalization and its historically strong underwriting and operating performance, which had produced consistently favorable levels of pre-tax operating and net income,” Best continued. “The ratings also recognize the benefits First Mercury derives from its 2011 acquisition by Fairfax, including enhanced financial flexibility, a position in a broadly diversified insurance and reinsurance operation and the investment expertise of Hamblin Watsa Investment Counsel Ltd.” As offsetting factors Best cited “the level of reserve strengthening that took place in 2010, which contributed significantly to the underwriting loss posted for the year and suppressed net income, and the risks associated with First Mercury’s growth in premium volumes in recent years.” Best added that the stable outlook reflects its expectation that First Mercury’s “future performance will return to historical levels and that risk-adjusted capitalization will remain comfortably supportive of its ratings.” Best summarized the companies affected by the ratings as follows: The FSR has been upgraded to A (Excellent) from A- (Excellent) and the ICR to “a” from “a-” for First Mercury Insurance Group and its following property/casualty pool members and reinsured affiliates: First Mercury Insurance Company; First Mercury Casualty Company; American Underwriters Insurance Company; Valiant Insurance Company; Valiant Specialty Insurance Company

A.M. Best Co. has revised the outlook to positive from stable and affirmed the financial strength rating of ‘B++’ (Good) and issuer credit rating of “bbb+” of Ohio-based Mennonite Mutual Insurance Company. Best said the affirmation reflects Mennonite’s “moderate underwriting leverage, generally favorable operating performance and long-standing local market presence. The company’s capital position is derived from management’s conservative operating strategies, solid agency relationships and prudent catastrophe risk management. As a result, pre-tax operating gains have been reported in each of the last five years. Mennonite’s consistency is reflective of management’s commitment to managing operational risk through the use of good risk selection, sound pricing and underwriting discipline. These results are reflected in the company’s five-year average combined and operating ratios, which compare favorably to the personal property industry composite.” Best added that the positive outlook reflects its “expectation that Mennonite will maintain conservative risk-adjusted capitalization and sustained operating profitability. As partial offsetting factors Best noted Mennonite’s “geographic concentration of property risk in Ohio, which exposes it to weather-related events and competitive market conditions. Also, the company maintains an elevated expense ratio when compared to the personal property industry composite.” However, Best also noted that the ” underwriting expense ratio is partially mitigated by the sound quality of the underlying book of business as evidenced by the company’s five-year average pure loss ratio, which significantly outperforms the industry composite.” Best said it expects Mennonite to “maintain consistent operating performance derived from its strict underwriting guidelines and conservative operating strategies specializing in serving the personal, commercial, farm and church insurance needs of its policyholders.”

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