By now you have heard that Warren Buffett’s bets on GE, Goldman, and Swiss Re and his derivatives positions have earned him a downgrade from Fitch Rating Agency. Below is the Fitch statement. I have highlighted the key sections:
Fitch Ratings has downgraded the Issuer Default Rating (IDR) and senior unsecured debt ratings of Berkshire Hathaway Inc. (NYSE:BRK/A) as follows:
–IDR to ‘AA+’ from ‘AAA’;
–Senior unsecured debt to ‘AA’ from ‘AAA’.
Fitch has concurrently affirmed its ‘AAA’ Insurer Financial Strength (IFS) ratings on BRK’s insurance and reinsurance subsidiaries. The Rating Outlook for all entities is Negative. See full list of rating actions below.
Today’s actions are part of a broader review of insurance and financial services company ratings being conducted by Fitch, which includes taking a fresh look at various risk factors and criteria application in light of the current stressful economic environment. Related to this ongoing exercise, which has resulted in numerous insurance and other financial services sector downgrades in recent weeks, Fitch believes that ‘AAA’ ratings are not appropriate at the holding company level for financial-oriented enterprises given significant market volatility and correlation of risks under stress, recently observed throughout the global economy.
With respect to BRK, Fitch views the company’s potential earnings and capital volatility derived from its large, unhedged market exposures as inconsistent with the stability required at the ‘AAA’ level. Such exposures include large, concentrated equity investments, as well as exposure to the equity and credit markets through various derivative contracts. Fitch views BRK’s investments in a wide variety of retail, service and manufacturing companies as mitigating this exposure somewhat, but Fitch does not view BRK’s degree of diversification as sufficient to offset these concerns at the ‘AAA’ level.
The downgrade also recognizes that even the most senior obligations at the holding company level are deeply subordinated to policyholder obligations at the regulated insurance and reinsurance company subsidiaries. Fitch notes this point is not new, but rather reflects Fitch’s view on appropriate weighting given to this risk in the current environment and at the current rating level.
BRK’s ratings also continue to reflect Fitch long-standing concerns with respect to ‘key man’ risk in the form of the company’s chairman, Warren Buffett. Fitch views this risk as unrelated to Mr. Buffet’s age, but rather Fitch’s belief that BRK’s record of outstanding long-term investment results and the company’s ability to identify and purchase attractive operating companies is intimately tied to Mr. Buffett. In current application of its criteria, Fitch does not view this concentration as consistent with an ‘AAA’ rating.
The ‘AAA’ IFS ratings of BRK’s insurance subsidiaries continue to reflect their strong capitalization and competitive positions, and underlying underwriting results. Fitch notes that at their current levels, BRK’s IFS, IDR and senior unsecured ratings continue to be among the highest in Fitch’s rating universe.
Fitch’s current ratings on BRK assume that the company is likely to continue to aggressively deploy its cash and capital as the potential for ongoing difficult economic and capital market conditions persists and companies look for investors with strong balance sheets to provide funding. Fitch would view this deployment as consistent with BRK’s long-standing opportunistic investment style although it adds an element of fluidity to BRK’s profile.
