Standard & Poor’s Ratings Services has assigned its ‘AAA’ financial strength and financial enhancement ratings to Berkshire Hathaway Assurance Corp. (BHAC). S&P also assigned its ‘AAA’ financial enhancement rating to Columbia Insurance Co. The outlook on both these entities is stable.
“The ratings on BHAC are based on a guaranty from Columbia in favor of BHAC that extends the Columbia ‘AAA’ rating to BHAC,” explained S&P credit analyst Damien Magarelli. S&P also indicated that the rating is based on an FER representation letter from Columbia that requires timely payment of BHAC’s financial guaranty obligations. Columbia owns 51 percent of BHAC and National Indemnity Co. (NICO) owns 49 percent of BHAC. Both Columbia and NICO are wholly owned indirect insurance operating subsidiaries of Berkshire Hathaway Inc. (BRK) -rated ‘AAA’ with a stable outlook. Both Columbia and NICO are considered core subsidiaries within BRK. Lastly, BHAC has a surplus of nearly $1 billion as of the first quarter of 2008 and is licensed as a financial guaranty insurer in 48 states and District of Columbia.
S&P noted: “The rating on BRK is based on its extremely strong competitive position, insurance and reinsurance capitalization, and financial flexibility. Berkshire Hathaway Inc. is one of the few holding companies with insurance and reinsurance operations that maintain pricing power, cycle management, distribution, and underwriting competitive advantages. In addition, the company had shareholders’ equity of about $121 billion at year-end 2007.
“Offsetting these positives are concerns about Berkshire Hathaway Inc.’s exposure to large loss events, investment concentrations, and exposure to adverse reserve development due to the assumption of retroactive risks.”
The rating agency said it expects “BRK’s earnings will be very strong in 2008, but they will remain potentially volatile if a sizable natural catastrophe or terrorist event were to occur.
“However, mitigating this volatility are the non-insurance operations, which continue to provide steady and increasingly higher amounts of diversified earnings to BRK, BRK’s sizeable shareholders’ equity, and a large investment portfolio that generates substantial earnings even at low interest rates.
“BRK’s capital adequacy will likely remain extremely strong, further mitigating potential volatility, but catastrophes should produce earnings volatility as opposed to a reduction in capital. BRK’s insurance and reinsurance competitive position is expected to continue to maintain cycle-management and pricing-power competitive advantages. BRK’s overall insurance expense ratio is expected to remain as a sustainable competitive advantage because of its direct insurance operations.”
S&P added, however that it “can only foresee revising the outlook to negative if a change in management were to occur, but we expect no such change. A negative outlook could result following a management change if the culture or BRK’s risk profile were to change substantially. Although investment expertise would likely weaken following a management change, this weakness isn’t expected to contribute to an immediate negative outlook. BRK already manages its various business operations on a decentralized basis, so the stand-alone management teams have significant industry experience, and this would not immediately change.”
S&P’s report added that it “views NICO’s senior management team as a significant catalyst for sourcing and analyzing new potential ventures, including insurance and non-insurance deals. This marginally reduces the concentration risk within the BRK management team. Lastly, Standard & Poor’s does not expect the CEO [Warren Buffett] to retire, except in the case of disability.”
Source: Standard & Poor’s – www.standardandpoors.com
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