A.M. Best Co. has reiterated the financial strength rating as well as issuer credit ratings of the subsidiaries of Berkshire Hathaway Inc.
(BRK.B - Free Report
) . Berkshire Hathaway Homestate Insurance Company’s FSR of A++ and ICR of aa+ were affirmed. The ratings of its five property and casualty units were also affirmed.
The FSR of A+ and ICR of “aa-”of Central States Indemnity Co. of Omaha, another unit of Berkshire, also witnessed a rating affirmation.
The ratings of the Berkshire unit known as North American Casualty Group (NAC) were also upgraded. The FSR was upped to A+ from A and ICR to “aa-” from “a+” of its subunits -- California Insurance Company, Continental Indemnity Company and Illinois Insurance Company. Another sub-unit Pennsylvania Insurance Company’s FSR was upped to to A+ from A and the ICR to “aa-” from “a” along with removing them from under review with developing implications.
The ratings of all these units carry a stable outlook and acknowledge their sturdy risk adjusted capital level, strong operating profitability and benefits available to them because they are a part of Berkshire Hathaway.
Other positives that supported the ratings affirmation of Berkshire Hathaway Homestate Insurance Company are efficient claims management, conservative reserving, low leverage, and an executive team which manages the company’s operations efficiently.
However, the unit is faced by some headwinds such as an above average allocation of equity in investment portfolio and uneven underwriting performance recently. The company’s business mix also remains concentrated in the California Workers Compensation line of business which exposes it to greater regulatory supervision.
Some of the negatives of Central States Indemnity Co. of Omaha are a decline in net written premium over the last five years, which is due to change in business mix. The unit, which earlier used to write credit insurance business, has shifted to non-credit insurance business. Other headwinds include increased investment leverage, execution risk and a drain on bottom-line earnings due to high cost incurred to change the business mix.
The ratings upgrade of North American Casualty Group acknowledges the company’s pricing philosophy, reserving practice and long term strategic business plans. The ratings also take into account the operating performance of its parent company, Applied Underwriters Inc., a niche player in bundled workers' compensation insurance and payroll processing services to small and medium-sized businesses.
The rating agency is confident that the company will maintain a strong capital position, given that Applied will continue to support NAC.
The rating upgrade of Pennsylvania takes into account its inclusion into the NAC intercompany reinsurance pooling arrangement.
Some of the shortcomings faced by the unit include limited product diversification with most of the business concentrated in the worker’s compensation line of business, which exposes it to greater regulatory scrutiny. Other negatives are a limited geographic spread and a limited operating experience.
Despite the negatives the stable outlook reflects no change in ratings over the near term for each of the units. Their strong capital position, flexibility to adapt to a volatile business environment and continued support from the parent supports the stable outlook.
Nevertheless, a negative rating action may occur if there is a decline in operating performance and capital position deteriorates.
Financial strength and credit ratings, which intend to measure a company’s ability to meet policyholder obligations, are important factors affecting public confidence and creditworthiness of a company, and hence provide a company’s competitiveness. Securing an investment grade debt rating with a stable outlook reflects optimism about the units future performance.
Berkshire Hathaway retains a Zacks Rank #2 (Buy). Other players from the same industry such as Alleghany Corp.
(Y - Free Report
) , Hanover Insurance Group Inc.
(THG - Free Report
) , Montpelier Re Holdings Ltd.
carrying Zacks Rank #1 (Strong Buy) are worth considering.