Warren Buffett’s conglomerate Berkshire Hathaway Inc. had its credit rating downgraded to AA from AA+ by Standard & Poor’s Financial Services LLC. And while it kept an insurance financial strength rating of AA+, its outlook across the Omaha-based firm is negative.
S&P’s release on Thursday said: “The lower credit rating on Berkshire Hathaway better reflects our view of its dependence on its core insurance operations for most of its dividend income.” When it comes to capital adequacy, the S&P is keeping an eye on insurance, because while “non-insurance business segments generate a majority of BRK’s operating income,” most haven’t been able to provide “a significant portion of the total dividends paid from the operating companies to the holding company.”
Insurance has been a focus within Berkshire, as well. Earlier in May, Mr. Buffett made headlines after he told Bloomberg that the company wanted to move into the commercial insurance business “very big time,” and hired a few AIG Inc. executives to help build the group.
The last time S&P downgraded the company was in February of 2010, when Berkshire fell from triple-A to AA+ over liquidity concerns stemming primarily from a railway acquisition. It wasn’t the first rating agency to cut the company’s rating at that time.
S&P then changed its outlook on Berkshire to negative from stable in the summer of 2011, after it downgraded United States debt to AA+.
Despite the downgrade and negative outlook released Thursday, S&P did have some nice words for Berkshire: “The ratings reflect our view of the group’s excellent business risk profile and very strong financial risk profile based on an extremely strong competitive position and very strong capital and earnings,” the S&P said in its release.
Just yesterday, investors were watching as Berkshire made changes to its investment portfolio, including reducing its stake in snack-food company Mondelez International Inc. and buying into construction company Chicago Bridge & Co.
Berkshire owns more than 80 companies and in early May reported first-quarter profits of $4.89-billion (U.S.). One of the main business lines is insurance, but as a value-investors, Mr. Buffett has also steered the company towards investments in big-name stocks such as U.S. bank Wells Fargo & Co. and Coca-Cola.