Warren Buffett’s Berkshire Hathaway Inc. had its credit grade lowered one level by Standard & Poor’s after the ratings company revised its criteria for evaluating insurers.
Berkshire was cut to AA from AA+, S&P said today in a statement about the Omaha, Nebraska-based company. The ratings firm said its outlook on all of Berkshire’s ratings is negative.
“The lower credit rating on BRK better reflects our view of BRK’s dependence on its core insurance operations for most of its dividend income,” John Iten, an S&P analyst, said in the statement, referring to Buffett’s company by its stock ticker.
The cut is the latest blow to Berkshire’s credit rating, which was given the highest level by S&P, Fitch Ratings and Moody’s Investors Service as recently as 2009. A plunging equity market in the first quarter of that year hurt the value of its stock portfolio and shrunk capital at insurance operations. In 2010, Buffett took on debt to buy railroad Burlington Northern Santa Fe.
Today’s downgrade brings S&P’s rating in-line with Moody’s, which rates Berkshire Aa2. Fitch rates Buffett’s company one level lower. Berkshire is the largest shareholder in Moody’s parent Moody’s Corp. Buffett didn’t immediately respond to a request for comment sent to an assistant.
Berkshire’s Class A shares fell 0.3 percent to $168,400 at 9:56 a.m. in New York, trimming their gain this year to 26 percent. That follows a 17 percent advance last year for Buffett’s firm. The company had about $49 billion in cash at the end of March.
As Berkshire’s chairman and CEO for more than four decades, Buffett, 82, built the firm from a textile maker into a company that sells insurance, hauls freight, generates electricity, manufactures chemicals and sells products from diamonds to underwear. The billionaire has used funds from insurance units including Geico to buy stocks and make acquisitions.
Berkshire’s non-insurance operating units, other than BNSF, typically don’t provide a significant portion of dividends to the holding company, Iten said. That makes the company dependent on insurance operations to meet obligations.
S&P cited the riskiness of Berkshire’s stock investments and the firm’s practice of holding less capital to back insurance operations than competitors as factors in the downgrade. Questions over who will replace Buffett also weighed on the rating, S&P said.
The negative outlook reflects the potential that a large acquisition or investment losses could drain capital, S&P said. It’s also tied to S&P’s negative outlook on the U.S. rating, according to the statement.
S&P published its revised ratings criteria for insurers last week. The measures include new liquidity metrics, an assessment of asset-liability matching risk and an analysis of enterprise risk management. At the time, S&P said a majority of ratings would not change and that positive ratings actions would exceed negative ones.
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