This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

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

NEW YORK (TheStreet) -- Berkshire Hathaway (BRK.A) 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

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 17,122.01 +15.31 0.09%
S&P 500 2,000.12 +0.10 0.00%
NASDAQ 4,569.6210 -1.0160 -0.02%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs