Lack Of Visibility On Buffett Successor A Concern—But Not Enough To Tip Best Ratings

May 15, 2013

A.M. Best affirmed the “A++” financial strength rating and “aaa” issuer credit ratings of Berkshire Hathaway’s National Indemnity Co. and its affiliates on Wednesday, while commenting on the lack of transparency into CEO succession planning and recent moves to launch an E&S unit.

The rating agency said the affirmation reflects National Indemnity’s consistently superior operating performance, historically strong risk-adjusted capitalization and global market profile.

“National Indemnity is a proven contributor to Berkshire’s overall operating strategy and ongoing success,” Best said in a statement, adding that the carrier’s management team is adept at managing the underwriting cycle and has the financial resources and acumen need to seize unique opportunities.

Best also noted that National Indemnity’s risk-based capitalization remains at the superior level, adding that conservative management of aggregate risk accumulations has keep the level superior even when faced with a series of severe shock losses.

Noting that National Indemnity’s operating performance is enhanced by investment returns derived from the strategies of Warren Buffett, Berkshire’s chief executive officer, the statement on the rating action said that the importance of “Buffett (as CEO) to the entire Berkshire organization and the lack of transparency with regard to his successor definitely pose a risk to the organization and is a continuing concern for A.M. Best.”

Adding that A.M. Best believes there are very strong internal candidates in line as potential successors, “the lack of clarity…adds a degree of uncertainty to the future direction of the corporation, as Mr. Buffett personally controls the capital allocation within the firm.”

“Nevertheless, A.M. Best believes Berkshire’s corporate strategy, culture and decentralized operating structure will facilitate a successful transition in management when it occurs,” Best added.

The rating agency also made note of recent announcements concerning National Indemnity’s expansion into the excess-and-surplus lines market. “A.M Best anticipates that this expansion will be measured and controlled as all necessary financial resources of the Berkshire organization will be made available for its latest endeavor.”

“The expanded excess-and-surplus lines operations are anticipated to be profitable in the near term with only a moderate effect on risk-based capitalization,” Best said.

The outlook for all ratings is stable.

Concurrently, A.M. Best affirmed the ICR of “bbb-” and debt rating of “bbb-” of Finial Holdings Inc. (Delaware) as well as the FSR of A- (excellent) and ICR of “a-” of Finial Reinsurance Company (Stamford, CT). A.M. Best also has affirmed the FSR of “A++” (superior) and ICR of “aa+” of Berkshire Hathaway Life Insurance Company of Nebraska (BHLN) and FSR of “A+” (Superior) and ICR of “aa-” of First Berkshire Hathaway Life “A+” Insurance Company (FBHL) (New York, NY).

Source: A.M. Best