Just a day after getting its key rating affirmed from A.M. Best Co., another rating agency Standard and Poor Rating Services (S&P), a division of The McGraw-Hill Companies surprised the investors by making a reverse rating action on Berkshire Hathaway Inc. (BRK.A
S&P seemed bothered by Berkshire’s undue reliance for dividend income on its insurance business. On the back of this concern, the ratings agency slashed its investment-grade counterparty credit rating for Berkshire and its debt rating by one notch to "AA" from "AA+." The rating agency, however, left unchanged the “AA+" ratings of Berkshire's insurance subsidiaries.
According to S&P, heavy equity investments made by Berkshire's insurance subsidiaries such as Geico and General Re exposes heavy equity investments made by those insurance subsidiaries and exposes them to greater risk than their peers.
This move by S&P comes after it has changed its criteria of rating the insurance companies. A key factor now for the rating agency to evaluate an insurer is its dependence on dividend income and the magnitude of its investment in equity shares.
Another major concern with S&P is the succession issue of Warren Buffett, who is at present both — the Chief Investment Officer and also the Chairman of the company.
Though Buffett has done his homework and has already finalized candidates who will take up senior positions which will fall vacant upon his resignation, details have been kept under wraps. The investment community and other stakeholders have no knowledge of who the successor will be. This has allowed room for considerable uncertainty for quite sometime now.
The outlook for the ratings remains negative, which implies that there is room for further adverse rating action over the near-to-medium term.
Prior to this Berkshire suffered rating cut in Feb 2010 when S&P slashed its AAA rating on the insurer.
Berkshire Hathaway retains a Zacks Rank #2 (Buy). Other players from the same industry such as Alleghany Corp. (Y
), Hanover Insurance Group Inc. (THG
), Montpelier Re Holdings Ltd. (MRH
), all carrying Zacks Rank #1(Strong Buy) are worth considering.