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Berkshire Is an Insurance Company, Not a Nation-State: S&P

NEW YORK ( TheStreet) -- Berkshire Hathaway (BRK.A - Get Report) is an insurance company and not a nation-state, according to rating agency Standard & Poor's, which cut the conglomerate's credit rating a notch below the AA+ grade it currently gives the U.S. government.

Warren Buffett-run Berkshire, with its subsidiaries spanning insurance, transportation, energy, housing and investments, has often been characterized as a mini-United States and a reflection of the country's economic prospects.

In a Thursday downgrade, S&P, however, sees the bulk of Berkshire's cash flow coming from its sprawling insurance operations and accordingly has cut the conglomerate's credit rating a notch below the government's to AA.

"The lower credit rating on [Berkshire Hathaway] better reflects our view of BRK's dependence on its core insurance operations for most of its dividend income," John Iten, a S&P analyst, wrote in a Thursday ratings action.

"Its non-insurance business segments generate a majority of BRK's operating income, but aside from the insurance subsidiaries only Burlington Northern Santa Fe LLC (BNSF) has provided a significant portion of the total dividends paid from the operating companies to the holding company."

Berkshire's leverage ratios are more consistent with an AA rating in the insurance industry, S&P said.

In the first quarter of 2013, Berkshire's insurance businesses, which include Geico and GeneralRE earned $33.2 billion of $43.9 billion in the company's overall revenue.

By contrast, the company's railroad, utilities and energy businesses earned just $8.4 billion in revenue, while it's near $100 billion investment portfolio eared $2.2 billion in revenue.

Previously, S&P had held Berkshire's credit rating at a cap equal to the government's current AA+ rating and "negative" outlook.

While S&P now sees Berkshire's credit rating as in-line with some insurance industry competitors, it nevertheless, continues to see the conglomerate's ratings as a reflection of the general health of the U.S. economy and the governments finances.

S&P currently holds Berkshire's ratings outlook as "negative," meaning a further downgrade is more likely than an upgrade, and cites the health of the U.S. government as a primary concern. The agency's negative outlook stems from a "sovereign rating cap of 'AA+/Negative', which applies to the obligations of the U.S. government, government-related enterprises, and U.S. financial services firms."

In August 2011, S&P was the first ratings agency to cut the Treasury's credit rating from AAA, citing a standoff on the government's so-called "debt ceiling" and the rising indebtedness of the nation in the wake of wars, tax cuts and a severe financial crisis.

S&P is a subsidiary of publishing conglomerate McGraw-Hill (MHP).

S&P also said it could continue to cut Berkshire's credit rating if risk at the firm's insurance unit rises or if Buffett and his lieutenant Charlie Munger were to cut a large acquisition, funded by insurance earnings.

Berkshire Hathaway Class A shares fell less than 1% to $167,897 in early afternoon trading. Shares have gained over 25% in 2013, amid a surge to new all-time record highs.

Berkshire's B Share Generation

-- Written by Antoine Gara

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