A.M. Best has reaffirmed the financial strength rating of A++ (Superior) and the issuer default rating of AAA for National Indemnity Group and its subsidiaries. National Indemnity is a subsidiary of Berkshire Hathaway. The outlook for all the ratings is stable. The affirmation of the ratings was made despite a significant reduction in statutory surplus at the end of 2008 due to the demonstrated track record of the company over several years along with the strength of the management team. Let’s take a look at a few selected excerpts from the ratings announcement.
Ability to Withstand Catastrophic Events
A.M. Best’s view on National Indemnity’s capitalization also assesses its capital position after an extreme catastrophic event as well as a material erosion in market valuation of common stock holdings. A key component of the ratings also takes into account National Indemnity’s core importance within the Berkshire Hathaway Inc. (NYSE: BRK.A and BRK.B) organization given the amount of “float” that has been accumulated by National Indemnity and other Berkshire Hathaway insurance operations, which constitute a significant source of Berkshire Hathaway’s total earnings and revenue base.
Benefits of Berkshire Hathaway’s Financial Strength
A.M. Best believes that National Indemnity’s financial position benefits from the significant asset value, cash flow generation and diversified earnings of Berkshire Hathaway’s non-insurance segments as well as Berkshire Hathaway’s financial flexibility and holding company cash resources and financing ability. Including operational debt, Berkshire Hathaway maintains conservative financial leverage, with total debt-to-total capital at approximately 25%, and strong interest coverage measures.
Benefits Derived From Recent Investments
A.M. Best notes that the recent debt and preferred stock investments made by Berkshire Hathaway, with the largest being the Goldman Sachs and General Electric investments, should begin to generate significant after tax income going forward which should help to support National Indemnity’s ratings:
Management’s conservative enterprise risk management strategy has enabled National Indemnity to absorb significant catastrophe losses in recent years, while maintaining ample capacity to support its ongoing business risks. National Indemnity monitors its catastrophe exposure on a zonal aggregate limit basis and has significantly reduced its catastrophe exposures in recent years. Additionally, A.M. Best believes that despite the volatility in the public equity markets, the group’s earnings should benefit from an estimated $1.3 billion of after-tax income derived through the recent debt and preferred stock investments made by Berkshire Hathaway.
Underwriting Discipline as a Competitive Advantage
National Indemnity has demonstrated underwriting expertise to achieve favorable operating returns over the long term, despite volatility in earnings stemming from high severity losses and irregular earned premiums derived from retroactive reinsurance or single large risk contracts. This is evidenced by the group’s five-year average statutory combined ratio of 88.8%, which significantly outperforms peer multi-line reinsurance groups on a comparable basis. Additionally, National Indemnity has exceptionally managed through property/casualty insurance pricing cycles and will enter markets when pricing is appropriate and withdraw capacity when rates become inadequate, which is a competitive advantage.
For full details on the ratings action, please refer to the press release issued today.