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

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NEW YORK ( TheStreet) -- Berkshire Hathaway 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 .

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.