CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed Berkshire Hathaway Inc.'s (NYSE: BRK) Issuer Default Rating (IDR) at 'AA-' and senior unsecured debt at 'A+'. In addition, Fitch has affirmed the 'AA+' Insurer Financial Strength (IFS) ratings on BRK's key insurance subsidiaries. The Rating Outlook is Stable. A complete list of ratings and rating actions follows at the end of this release.
KEY RATING DRIVERS
Fitch's ratings on BRK continue to be supported by its diverse sources of earnings with a history of solid profitability. Financial flexibility and liquidity are key rating attributes and Fitch maintains a favorable view of BRK's access to capital markets and large holdings of cash and equivalents. BRK's insurance operations continue to be a key area of earnings and expertise within BRK and are typified by a large market position, size and scale, consistent underwriting profits and extremely strong capitalization.
Balanced against these strengths are increasing debt levels, declining interest coverage and general earnings volatility risk given BRK's material exposures to equity markets, insured natural catastrophes and asbestos and environmental retroactive reinsurance. BRK's acquisition strategy brings additional risks including potential earnings volatility and increased financial leverage.
BRK reported net income of $5.6 billion for the first quarter of 2016 or an 8.7% annualized return on equity, up modestly from $5.2 billion and 8.6% in the comparable period of 2015. The bottom line result masked weakness in earnings from both insurance operations and Burlington Northern and Santa Fe (BNSF).
The insurance operations accounted for a little more than one-quarter of BRK's $5.7 billion in pre-tax earnings allocated to operating segments, which was the largest contributor along with manufacturing through the first quarter of 2016. Growth in earnings from the manufacturing segment reflects the acquisition of Precision Castparts Corp. (PCC).
BRK's insurance group reported $1.5 billion in earnings before tax in the first quarter of 2016, down from $1.8 billion in the comparable period in 2015. Worsening trends in BRK's property/casualty reinsurance business were primarily responsible for deteriorating profitability in BRK's insurance segment.
Pre-tax earnings from BNSF railroad operations deteriorated during the first quarter of 2016 to $1.3 billion, down from $1.7 billion in the comparable quarter of 2015 due to declines in unit volume. Fitch expects BNSF's profitability for the remainder of 2015 to be squeezed by lower freight volumes attributable to a softening demand for energy related products such as oil and coal that will be partially offset by reduced plans for capital expenditures.
BRK's GAAP basis earnings will continue to be exposed to accounting earnings volatility given the large notional values and long duration of BRK's outstanding derivative contracts. Additionally, Fitch believes that BRK's earnings will be exposed to potential volatility from the company's reinsurance businesses and its exposure to catastrophe-related losses as well as the company's large equity investment portfolio.
BRK maintained excellent financial flexibility despite a decline in cash and equivalents to $58 billion at March 31, 2016 from $71 billion at year-end 2015 following the acquisition of PCC and additional investments in various common stocks. At March 31, 2016, BRK's subsidiaries in aggregate had approximately $9.2 billion in available capacity under lines of credit and commercial paper with $4.4 billion related to BHE and its subsidiaries.
BRK's consolidated financial leverage ratio (FLR) was 28.0% as of March 31, 2016, up from 24.6% at year-end 2015 following the PCC acquisition. The consolidated FLR includes $58 billion of debt attributable to BRK's Railroad, Utilities and Energy business. Fitch expects these major non-insurance businesses will service their own debt.
An alternate calculation of BRK's financial leverage ratio, using holding company debt and debt issued by the finance operations and guaranteed by BRK, was 20.5% at March 31, 2016. The agency views BRK's ability to fund finance operations at a low cost as an important competitive advantage for the finance operations and also notes that much of the finance company debt is guaranteed by BRK.
Consolidated interest coverage for the first three months of 2016 was 5.6x, excluding the impact from realized investment gains and derivative gains, which is down from 8.0x for the full year 2015 and below Fitch's expectations of 12x for companies at BRK's rating level. An alternate calculation of interest coverage, excluding railroad, utilities and energy, was 8.3x during the first three months of 2016. The deterioration in the interest coverage ratio is attributable to additional debt from the PCC acquisition.
Following the acquisition of PCC, BRK is approaching Fitch's tolerances on financial leverage and interest coverage. Consequently, another material acquisition similarly or more aggressively financed than the PCC acquisition would place downward pressure on BRK's ratings.
RATING SENSITIVITIES
Key rating triggers that could lead to a future downgrade include:
--Deterioration in the credit quality of key insurance subsidiaries (National Indemnity, GenRe, and GEICO) that is no longer consistent with the current 'AA+' rating. Measures of credit quality include Fitch's judgment of capitalization, a total financing and commitments ratio greater than 1.5x, net leverage (excluding affiliated investments) over 3.5x or a sharp and persistent reduction in underwriting profits.
--A consolidated run-rate debt-to-total capital ratio that exceeds 30% or a run-rate debt-to-total capital ratio from the holding company, insurance and finance operations (including debt issued or guaranteed by the holding company) that exceeds 25%.
--Material increases in leveraged equity market exposure such as its equity index put derivative portfolio.
--Acquisitions or other actions that reduce outstanding cash below $10 billion or approximately 5x consolidated interest expense.
Key rating triggers that could lead to an upgrade include:
--A commitment to lower debt-to-tangible capital ratios attributed to the holding company, insurance and finance operations. Fitch believes that this would likely require the scaling back of the finance operations.
Fitch has affirmed the following ratings:
Berkshire Hathaway, Inc.
--Issuer Default Rating (IDR) at 'AA-';
--$750 million 2.20% senior notes due August 2016 at 'A+';
--$1.1 billion 1.9% senior notes due January 2017 at 'A+';
--$800 million 1.55% senior notes due February 2018 at 'A+';
--$750 million 2.1% senior notes due August 2019 at 'A+';
--EUR1.0 billion 0.500% senior notes due March 2020 at 'A+';
--$1.0 billion 2.2% senior notes due March 2021 at 'A+';
--$500 million 3.75% senior notes due August 2021 at 'A+';
--$600 million 3.40% senior notes due January 2022 at 'A+'
--EUR750 million 0.75% senior notes due March 2023 at 'A+';
--$2.0 billion 2.75% senior notes due March 2023 at 'A+';
--$500 million 3.0% senior notes due February 2023 at 'A+';
--EUR1.0 billion 1.3% senior notes due March 2024 at 'A+';
--$2.5 billion 3.125% senior notes due March 2026 at 'A+';
--EUR1.25 billion 1.125% senior notes due March 2027 at 'A+';
--EUR750 million 2.150% senior notes due March 2028 at 'A+';
--EUR1 billion 1.625% senior notes due March 2035 at 'A+';
--$1 billion 4.5% senior notes due February 2043 at 'A+'.
Berkshire Hathaway Finance Corporation (BHFC)
--IDR at 'AA-';
--$1 billion 0.95% senior notes due August 2016 at 'A+';
--$400 million floating rate senior notes due January 2017 at 'A+';
--$650 million floating rate senior notes due January 2017 at 'A+';
--$1,350 million 1.6% senior notes due May 2017 at 'A+';
--$400 million floating rate senior notes due August 2017 at 'A+';
--$600 million floating rate senior notes due January 2018 at 'A+';
--$750 million 1.45% senior notes due March 2018 at 'A+';
--$1.0 billion floating rate senior notes due March 2018 at 'A+';
--$1.25 billion 5.4% notes due May 2018 at 'A+';
--$500 million 2.0% senior notes due August 2018 at 'A+'
--$500 million 1.3% senior notes due May 2018 at 'A+';
--$1.25 billion 1.7% senior notes due March 2019 at 'A+';
--$500 million floating rate senior notes due March 2019 at 'A+';
--$550 million 2.9% senior notes due October 2020 at 'A+';
--$750 million 4.25% senior notes due January 2021 at 'A+';
--$775 million 3.0% senior notes due May 2022 at 'A+';
--$750 million 5.750% senior notes due January 2040 at 'A+';
--$725 million 4.4% senior notes due May 2042 at 'A+';
--$500 million 4.3% senior notes due May 2043 at 'A+'.
GEICO Corporation
--IDR at 'AA-';
--$150 million 7.4% senior notes due July 15, 2023 at 'A+'.
General Re Corporation
--IDR at 'AA-';
--Short-term IDR at 'F1+'.
Fitch affirmed the following insurance subsidiaries that carry an 'AA+' Insurer Financial Strength:
--Government Employees Insurance Company;
--General Reinsurance Corporation;
--General Star Indemnity Company;
--General Star National Insurance Company;
--Genesis Insurance Company;
--National Indemnity Company;
--Columbia Insurance Company;
--National Fire and Marine Insurance Company;
--National Liability and Fire Insurance Company;
--National Indemnity Company of the South;
--National Indemnity Company of Mid-America;
--Wesco Financial Insurance Company.
Additional information is available at www.fitchratings.com
Although BRK's General Reinsurance Corp. subsidiary participated directly in the rating process, BRK did not participate other than through the medium of its public disclosure.
Applicable Criteria
Insurance Rating Methodology (pub. 17 May 2016)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881564
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009140
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009140
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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