Fitch Affirms Ratings of Berkshire Hathaway Inc.

Thu Sep 12, 2013 4:57pm EDT

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(The following statement was released by the rating agency) CHICAGO, September 12 (Fitch) 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 rating actions follows at the end of this release. Fitch's ratings on BRK are supported by 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 consolidated financial leverage was 24% of total capital as of June 30, 2013. Consolidated interest coverage for the first six months of 2013 was 9.4x and excluded investment and derivative gains or losses from the calculation. BRK's debt-to-total capital and debt-to-tangible capital ratios at the holding company level (including debt issued by the company's finance segment subsidiaries that is guaranteed by BRK) were moderate at 17% and 22%, respectively at June 30, 2013. BRK's ability to fund finance operations at a low cost is an important competitive advantage for the finance operations and a considerable portion 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 $9.4 billion for the first half of 2013, up from $6.4 billion in the comparable period of 2012. All segments reported growth in pre-tax earnings, but the insurance segment was responsible for the majority of the period-to-period increase. BRK's insurance group reported $4.7 billion in earnings before tax in the first half of 2013, accounting for 39% of BRK's $12.1 billion in total pre-tax earnings. Burlington Northern and Santa Fe (BNSF) railroad operation continues to make significant contributions to earnings. BNSF reported a pretax gain of $2.7 billion (22% of BRK's total pre-tax earnings) for the first six months of 2013, up from $2.4 billion over the comparable period in 2012. BRK's first half 2013 annualized return on equity was 9.8%, excluding unrealized gains on fixed income securities, up from 7.5% in the comparable period of 2012. Consolidated operating interest coverage for the first six months of 2013 was 9.4X, which is below Fitch's expectations of 12x for companies at BRK's rating level. Somewhat offsetting this is approximately $31 billion of cash and equivalents mostly at the insurance operating companies at June 30, 2013, which would cover annual interest expense by 11x. 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, AIG and CNA. Fitch estimates BRK has approximately $13 billion in A & E reserves at year-end 2012 and these reserves covered average paid losses by greater than 15x. SENSITIVITY/RATING DRIVERS 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-'. --$750 million floating rate senior notes due Aug. 2014 at 'A+'; --$1.7 billion 3.20% senior notes due February 2015 at 'A+'; --$300 million 0.8% senior notes due February 2016 at 'A+'; --$750 million 2.20% senior notes due August 2016 at 'A+'; --$1.1 billion 1.9% senior notes due January 2017 at 'A+'; --$800 million 1.55% senior notes due February 2018 at 'A+'; --$500 million 3.75% senior notes due August 2021 at 'A+'; --$600 million 3.40% senior notes due January 2022 at 'A+' --$500 million 3% senior notes due February 2023 at 'A+'; --$1 billion 4.5% senior notes due February 2043 at 'A+'. Berkshire Hathaway Finance Corporation (BHFC) --IDR at 'AA-'; --$950 million 4.625% notes due October 2013 at 'A+'; --$375 million floating rate senior notes due January 2014 at 'A+'; --$375 million 1.50% senior notes due January 2014 at 'A+'; --$400 million 5.1% notes due July 2014 at 'A+'; --$1 billion 4.85% notes due January 2015 at 'A+'; --$500 million 2.45% senior notes due December 2015 at 'A+'; --$1,350 million 1.6% senior notes due May 2017 at 'A+'; --$1.25 billion 5.4% notes due May 2018 at 'A+'; --$750 million 4.25% senior notes due January 2021 at 'A+'; --$775 million 3% senior notes due May 2022 at 'A+'; --$750 million 5.75% senior notes due January 2040 at 'A+'; --$725 million 4.4% senior notes due May 2042 at at 'A+'; --$500 million 4.3% senior notes due May 2043 at 'A+'. --$600 million 0.95% notes due August 2016 'A+'; --$500 million 1.3% notes due May 2018 'A+'; --$400 million 2% notes due August 2018 '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 'F1+'; --Short-term IDR 'F1+'. Fitch has affirmed the 'AA+' Insurer Financial Strength ratings on the following BRK insurance subsidiaries: --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. Contact: Primary Analyst Douglas M. Pawlowski, CFA Senior Director +1-312-368-2054 Fitch Ratings, Inc. 70 W. Madison Chicago, IL 60602 Secondary Analyst Christopher A. Grimes, CFA Associate Director +1-312-368-3263 Committee Chairperson Douglas L. Meyer, CFA Managing Director +1-312-368-2061 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. 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 here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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