Berkshire Is an Insurance Company, Not a Nation-State: S&P
NEW YORK ( TheStreet) -- Berkshire Hathaway
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
"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
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.