* Rating cut to AA, in line with Moody's, from AA-plus
* S&P cites dependence on insurance units for dividends
By Jennifer Ablan, Ben Berkowitz and Jonathan Stempel
May 16 Warren Buffett's Berkshire Hathaway Inc
had its credit rating cut one notch by
Standard & Poor's, which cited a new methodology for evaluating
insurers and Berkshire's dependence on its insurance business
for dividend income.
The rating was cut to "AA" from "AA-plus," and S&P assigned
a "negative" outlook, suggesting another cut could occur within
a few years. S&P left its credit and financial strength ratings
for Berkshire's insurance operating units at "AA-plus."
Thursday's downgrade brings S&P's rating in line with the
"Aa2" rating that Berkshire holds from Moody's Investors
Service. Those ratings are the agencies' third-highest.
"The lower credit rating on Berkshire better reflects our
view of Berkshire's dependence on its core insurance operations
for most of its dividend income," S&P analyst John Iten wrote.
Jeff Matthews, a Berkshire shareholder who has written books
about the company, said S&P's concerns appeared overblown,
citing the insurance units' profitability and the $73 billion of
"float," or money held between when policyholders make payments
and claims are paid, they provide to help Berkshire invest.
"Which would S&P rather have, a lousy insurance underwriter
with 'non-volatile' investments, or a world-class insurance
underwriter with world-class, if sometimes 'volatile,'
investments?" he asked.
Berkshire was rated "triple-A" by Moody's and S&P as
recently as 2009. It lost the ratings after the global financial
crisis boosted potential liabilities, and Buffett bought the
railroad Burlington Northern Santa Fe Corp for $26.5 billion.
S&P said that while Berkshire retains a "very strong
financial risk profile," with noninsurance operations generating
a majority of operating profit, only Burlington Northern
provides a significant portion of total dividends paid by those
operating companies to the parent holding company.
Other negative factors cited by S&P include Berkshire's
"high tolerance" for equity investments, which totaled $95.9
billion as of March 31 and can add capital volatility, and
Berkshire's eventual need to replace the 82-year-old Buffett.
At Berkshire's annual meeting on May 4, Buffett said the
company's board was "solidly in agreement" on an unnamed
internal executive to step in as chief executive if needed.
Berkshire has said it plans to install other people as chief
investment officer, and Buffett's son Howard as non-executive
chairman. Warren Buffett holds the CIO and chairman roles.
S&P's outlook stems from a ratings cap for financial
companies linked to the United States' "AA-plus" rating, as well
as capital risks at the insurance units, especially if they were
to add investment risk exposure or fund a large acquisition.
The S&P downgrade had no effect on Berkshire's bond prices.
The 4.3 percent bonds maturing in 2043 that a finance unit sold
last week rose 1.2 cents on the dollar to 99.7 cents, according
to bond pricing service Trace.
In Thursday trading, Berkshire Class A shares closed down
$1,637 at $167,303, and Class B shares fell $1.23 to $111.54.