CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'AA-' Issuer Default Rating (IDR) of Berkshire Hathaway Inc. (NYSE:BRK) and the 'AA+' Insurer Financial Strength (IFS) ratings on BRK's key insurance subsidiaries. The Rating Outlook is Stable. A complete list of ratings and rating actions is shown at the end of this release.
KEY RATING DRIVERS:
Fitch's ratings are supported by BRK's extremely strong capitalization and market position of its insurance subsidiaries, solid operating performance with good diversification across business lines, and excellent financial flexibility and liquidity.
Also considered in the ratings are material equity market risk, insured natural catastrophe exposures, growing exposure to asbestos and environmental risk, and various issues associated with the company's acquisition strategy.
BRK's large market position, size and scale are consistent with Fitch's 'AA' IFS rating category.
The capitalization of BRK's insurance operations is considered 'Extremely Strong' as measured by Fitch's Prism capital model and is heavily weighted in the company's current rating.
BRK's consolidated financial leverage ratio was 24% as of June 30, 2014. BRK's financial leverage ratio at the holding company level (including debt issued by the company's finance company subsidiaries and guaranteed by BRK) was 14% at June 30, 2014. The agency views BRK's ability to fund finance operations at a low cost as an important competitive advantage for the finance operations and also notes that much of the finance company debt is guaranteed by BRK.
Fitch's expectation is that BRK's major non-insurance business units, including the company's utilities and railroad business, will service their own debt.
BRK reported net income of $11.1 billion for the first half of 2014 (1H'14), up from $9.4 billion in the comparable period of 2013. BRK's insurance group reported $3.8 billion in earnings before tax in 1H'14, accounting for roughly one-third of BRK's $11.8 billion in pre-tax earnings. Investment gains were primarily responsible for the period-to-period increase in earnings.
The Burlington Northern and Santa Fe (BNSF) railroad operation continues to make significant contributions to earnings. BNSF reported a pretax gain of $2.6 billion (22% of BRK's total pre-tax earnings) for the first six months of 2014, relatively unchanged from the comparable period in 2013.
BRK's 1H'14 annualized return on equity was 9.8%, excluding unrealized gains on fixed income securities, level from the comparable period of 2013.
Consolidated GAAP interest coverage for the first six months of 2014 was 8.2x, which is below Fitch's expectation of 12x for companies at BRK's rating level. Somewhat offsetting this is approximately $27 billion of cash and equivalents at the insurance operating companies at June 30, 2014, which would cover annual interest expense by 8x.
BRK's GAAP-basis earnings will continue to be exposed to earnings volatility given the large notional values and long duration of BRK's outstanding derivative contracts. Additionally, Fitch believes that BRK's earnings will be exposed to potential volatility from the company's reinsurance businesses and its exposure to catastrophe-related losses as well as the company's large equity investment portfolio.
BRK has grown its asbestos & environmental insured liability exposure through retroactive reinsurance contracts most notably with Equitas Limited, Swiss Re, CNA Financial Corp, AIG and Liberty Mutual. Fitch estimates BRK has approximately $13 billion in A&E reserves at year-end 2013 and these reserves covered average paid losses by greater than 14x.
RATING SENSITIVITIES:
Key rating triggers that could lead to a future downgrade include:
--Deterioration in the credit quality of key insurance subsidiaries (National Indemnity, GenRe, and GEICO) that is no longer consistent with the current 'AA+' rating. Measures of credit quality include Fitch's judgment of capitalization, a total financing and commitments ratio greater than 1.5x, net leverage (excluding affiliated investments) over 3.5x or a sharp and persistent reduction in underwriting profits.
--A consolidated run-rate debt-to-total capital ratio that exceeds 30% or a run-rate debt-to-total capital ratio from the holding company, insurance and finance operations (including debt issued or guaranteed by the holding company) that exceeds 25%.
--Material increases in leveraged equity market exposure such as its equity index put derivative portfolio.
--Acquisitions or other actions that reduce outstanding cash below $10 billion or approximately 5x consolidated interest expense.
Key rating triggers that could lead to an upgrade include:
A commitment to lower debt-to-tangible capital ratios attributed to the holding company, insurance and finance operations. Fitch believes that this would likely require the scaling back of the finance operations.
Fitch has affirmed the following ratings:
Berkshire Hathaway, Inc.
--IDR at 'AA-'.
--$1.7 billion 3.20% senior notes Feb. 2015 at 'A+';
--$300 million 0.8% senior notes due May 2016 at 'A+';
--$750 million 2.20% senior notes due Aug. 2016 at 'A+';
--$1.1 billion 1.9% senior notes due Jan. 2017 at 'A+';
--$800 million 1.55% senior notes due May 2018 at 'A+';
--$750 million 2.1% senior notes due Aug. 2019 at 'A+';
--$500 million 3.75% senior notes due Aug. 2021 at 'A+';
--$600 million 3.40% senior notes due Jan. 2022 at 'A+'
--$500 million 3.0% senior notes due May 2023 at 'A+';
--$1 billion 4.5% senior notes due May 2043 at 'A+'.
Berkshire Hathaway Finance Corporation (BHFC)
--IDR at 'AA-';
--$1 billion 4.85% notes due Jan. 2015 at 'A+';
--$500 million 2.45% senior notes due Dec. 2015 at 'A+';
--$1 billion 0.95% senior notes due Aug. 2016 at 'A+';
--$650 million floating rate senior notes due Jan. 2017 'A+';
--$1,350 million 1.6% senior notes due May 2017 'A+';
--$400 million floating rate senior notes due Aug. 2017 at 'A+';
--$1.25 billion 5.4% notes due May 2018 at 'A+';
--$500 million 2.0% senior notes due May 2018 'A+'
--$500 million 1.3% senior notes due May 2018 at 'A+';
--$550 million 2.9% senior notes due Oct. 2020 at 'A+';
--$750 million 4.25% senior notes due Jan. 2021 at 'A+';
--$775 million 3.0% senior notes due May 2022 at 'A+';
--$750 million 5.750% senior notes due Jan. 2040 at 'A+';
--$725 million 4.4% senior notes due May 2042 at 'A+';
--$500 million 4.3% senior notes due May 2043 at 'A+'.
GEICO Corporation
--IDR at 'AA-';
--$150 million 7.4% senior notes due July 15, 2023 at 'A+'.
General Re Corporation
--IDR at 'AA-'.
--$500 million commercial paper program at 'F1+';
--Short-term IDR at 'F1+'.
Fitch affirmed the following insurance subsidiaries that carry an 'AA+' IFS:
--Government Employers Insurance Company;
--General Reinsurance Corporation;
--General Star Indemnity Company;
--General Star National Insurance Company;
--Genesis Insurance Company;
--National Indemnity Company;
--Columbia Insurance Company;
--National Fire and Marine Insurance Company;
--National Liability and Fire Insurance Company;
--National Indemnity Company of the South;
--National Indemnity Company of Mid-America;
--Wesco Financial Insurance Company.
Additional information is available at 'www.fitchratings.com'.
ALTHOUGH BRK'S GENERAL REINSURANCE CORP. SUBSIDIARY PARTICIPATED DIRECTLY IN THE RATING PROCESS, BRK DID NOT PARTICIPATE OTHER THAN THROUGH THE MEDIUM OF ITS PUBLIC DISCLOSURE.
Applicable Criteria & Related Research:
--'Insurance Rating Methodology' (Aug. 19, 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=913596
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