While affirming the “AA+” financial strength and long-term counterparty credit ratings on Berkshire Hathaway operating insurance subsidiaries, S&P Global Ratings said Monday that it revised the outlook on those ratings to negative from stable.

The affirmations and changed outlook for National Indemnity Co., Government Employees Insurance Co., General Reinsurance Corp., and other related insurance subsidiaries (together BRKIS) were not triggered by any new information, but instead were taken as part of S&P’s normal credit surveillance, the rating agency said.

“The negative outlook reflects our view that there is one-in-three chance that our assessment of risk-adjusted capitalization might not be redundant at the ‘AA’ level or supportive of its overall creditworthiness assessment relative to other highly rated issuers who maintain higher levels of S&P Global Ratings’ risk-based capitalization,” the rating firm said in a statement.

Robust organic growth, a large amount of retrospective reinsurance transacted by National Indemnity this year, and corresponding growth in loss reserves and invested assets are driving a large increase in risk-based capital requirements, as measured by S&P Global Ratings’ capital model, the statement said.

Noting that the retrospective reinsurance business will result in material drag on available statutory capital, S&P also said it expects lower operating income for BRKIS this year, in part due to lower underwriting income than in recent years.

Putting all these considerations together, S&P expects BRKIS’ risk-based capitalization (as assessed by S&P Global Ratings) to decline to the “A” (strong) level this year. Although normalized earnings are expected to be sufficient to restore capitalization to the “AA” (very strong) level over the next one-to-two years, “the pace of capital build-up can also be influenced by the amount of dividends paid to BRK, which have been substantial in the past five years,” S&P said.

“Additional risk stems from the potential for large deals either at BRKIS or at the corporate level in the interim prior to the capital strengthening to its historical levels,” S&P said in a statement.

Source: S&P Global Ratings