Buffett's Berkshire loses top rating

Buffett's Berkshire loses top rating

Moody's cut its rating on Warren Buffett's holding company two notches, saying investment losses were hurting the company's ability ot meet its funding needs.

NEW YORK (Reuters) -- Moody's Investors Service cut its credit ratings on Berkshire Hathaway Inc. from Aaa, the top rating, saying the recession and investment losses at insurance operations of investor Warren Buffett's holding company reduced its ability to support funding needs.

Wednesday's cut to Berkshire's rating means Moody's no longer has a Aaa rating on any company with significant financial-services operations.

Moody's cut the ratings on Omaha, Neb.-based Berkshire (BRK-A) to Aa2, the third-highest investment grade, and cut to Aa1, the second-highest, its ratings on Berkshire's reinsurance subsidiary National Indemnity Co and bond insurance arm Berkshire Hathaway Assurance Corp.

The downgrades come more than a month after Berkshire reported a 62% drop in profit, the worst year since Buffett took over 44 years ago. The outlook for all the ratings is stable, Moody's said, indicating an additional rating change is not anticipated over the next 12 to 18 months.

A Berkshire spokeswoman was not immediately available to comment.

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The cut by Moody's comes nearly four weeks after Fitch stripped Berkshire of its top rating, saying it believed "AAA ratings are not appropriate at the holding company level for financial-oriented enterprises," lowering its rating to AA.

Fitch also raised so-called "key man risk," pointing to 78-year-old Buffett's lack of a publicly named successor.

Berkshire is still clinging to its triple-A rating from Standard & Poor's. But on March 25, S&P changed its outlook on Berkshire to negative, indicating a downgrade is now more likely.

S&P on Wednesday cut the ratings on all major U.S. mortgage insurers, saying the deterioration in the residential mortgage market had translated into greater delinquency rates than it had anticipated.

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Moody's cut to Berkshire's ratings leaves only four other companies with its top rating: Johnson & Johnson (JNJ, Fortune 500), Exxon Mobil Corp (XOM, Fortune 500), Microsoft Corp (MSFT, Fortune 500) and Automatic Data Processing Inc (ADP, Fortune 500).

Financial fallout. Analysts said Berkshire's downgrade reflected what investors already knew -- that no one is immune from the worst financial crisis in decades.

"This has been the most critical financial environment of our lifetimes," said Michael Holland, head of New York-based investment firm Holland & Co, which holds Berkshire shares. "Any financial company, including Warren Buffett's, has been affected by it. Moody's is saying it is so, long after the fact."

"Moody's is taking preemptive action," said Sean Egan, managing director of Egan-Jones Ratings Co in Haverford, Pa. "We think the Moody's downgrade is not a major move. It won't cost them a lot of business," Egan said, adding that his own ratings company would probably take Berkshire down a notch or two.

Berkshire is a large investor in Moody's.

Falling stock prices have reduced the value of National Indemnity's investment portfolio, in turn weakening its capital cushion relative to its insurance and investment exposures, Moody's said in a statement.

About half of Berkshire's results come from its insurance businesses. The company's declines in the last year came mainly from paper losses on derivative contracts tied to stock market indexes. Berkshire's equity holdings, such as American Express Co. (AXP, Fortune 500) and Wells Fargo & Co (WFC, Fortune 500)., have also suffered big declines in value.

Other, non-insurance businesses at the company have also seen "a meaningful drop in earnings and cash flows, particularly for businesses tied to the U.S. housing market, construction, retailing or consumer finance," Moody's added.

Since taking over Berkshire in 1965, Buffett has transformed it from a failing textile maker into a sprawling insurance and investment company, with nearly 80 businesses.

Over the years, Buffett has amassed a fortune worth $37 billion and making him the world's second-richest person, according to Forbes magazine. Berkshire products include Geico car insurance, Borsheim's Fine Jewelry and Fruit of the Loom underwear.

The company's bond insurance arm Berkshire Hathaway Assurance (BHAC) had been the only insurer of municipal bonds to have retained its top credit rating, although it has not been a major player in insuring primary deals.

BHAC insured just $3.3 billion in new debt last year, according to Thomson Reuters data. Buffett said about $15.6 billion was insured in the secondary market for munis, although 77% of that was on bonds that were already insured by lower-rated guarantors.

Class A shares of Berkshire closed Wednesday at $88,960 on the New York Stock Exchange, nearly 40% below the $147,000 year-high set Sept. 19, according to Reuters data.

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