Ratings agency Standard and Poor’s has lowered its credit grade on Berkshire Hathaway (NYSE:BRKA)(NYSE:BRKA) by one grade, from AA+ to AA, after revising its criteria for evaluating insurance companies. Along with the downward revision, the agency said that its outlook on Berkshire is negative, citing the company’s dependence on insurance operations for most of its income.
Broadly, Berkshire operates four insurance and reinsurance businesses: GEICO, General Re, Berkshire Hathaway Reinsurance Group, and Berkshire Hathaway Primary Group. In its first-quarter earnings release, the company commented that: “Our management views insurance businesses as possessing two distinct operations – underwriting and investing.”
The company continued: “Underwriting decisions are the responsibility of the unit managers; investing decisions, with limited exceptions, are the responsibility of Berkshire’s Chairman and CEO Warren E. Buffett. Accordingly, we evaluate the performance of underwriting operations without any allocation of investment income.”
S&P’s revised ratings criteria include new measures of liquidity. In its downgrade, the firm stated that the negative outlook reflects the possibility that a large investment loss or acquisition could reduce capital to an uncomfortably low level.
Some investors have dismissed the downgrade, given S&P’s dubious history. The firm was infamous for giving triple-A ratings to mortgage-backed securities before the housing bubble burst.
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