Why S&P Now Favors Berkshire Hathaway as a Conglomerate Rather Than an Insurance Giant

Standard & Poor’s has announced that Berkshire Hathaway Inc. (NYSE: BRK-A) is now officially off of its CreditWatch Negative list. Not only have Warren Buffett’s ratings been affirmed, but the credit ratings agency said it is now analyzing Berkshire Hathaway as a corporate conglomerate under its methodology rather than as an insurance holding company.

S&P noted specifically that the Precision Castparts acquisition is a neutral to the rating on Berkshire Hathaway. S&P has now affirmed its AA/A-1+ local currency rating and for its foreign currency rating.

As noted, Berkshire Hathaway’s top stock holdings have been under lots of change as well. Buffett now has six top stocks rather than just four, and he even invested into a former master limited partnership in the oil and gas infrastructure sector.

S&P’s placed Berkshire Hathaway’s ratings on CreditWatch Negative back on August 11, 2015. The outlook is now listed as stable.

S&P was most full of praise for Berkshire Hathaway despite the CreditWatch note from 2015. They talked up its excellent business risk profile on a consolidated basis, as well as above-average earnings and cash flow generation. While this changed how Berkshire Hathaway is evaluated, the report did specify that the ratings agency continues to view the operating insurance operations as core to Berkshire Hathaway.

Another note was mentioned that the outlook on the operating insurance subsidiaries is stable. This was based on S&P’s expectation that the insurance operating companies will maintain a very strong capital and earnings position supported by extremely strong competitive position and strong earnings-generation capability during the next two to three years.

Friday’s credit ratings from credit analyst Laline Carvalho said:

The affirmation of our financial strength ratings on BRKIS incorporates our view that the operating insurance subsidiaries maintain consolidated capital adequacy modestly in the extremely strong range on a prospective basis, and a very strong capital and earnings profile that supports our ratings. When we placed the operating insurance companies on CreditWatch Negative in August 2015, there was uncertainty regarding the amount of capital that the ultimate parent might dividend from its insurance operating subsidiaries to help fund its acquisition of Precision Castparts Corp. (PCP), and whether such amounts could lead to a potentially significant decline in the operating insurance companies’ consolidated property/casualty and life capital adequacy model. Ultimately BRK funded the January 2016 acquisition of PCP through a combination of increased leverage at the holding company and cash resources from several of its subsidiaries. The amount of dividends removed from the insurance operating subsidiaries to help fund the acquisition was lower than we had originally anticipated, with capital metrics at the insurance companies remaining in line with our expectation for those ratings.

Berkshire Hathaway shares were last seen up 0.8% at $197,565 on Friday, versus a 52-week range of $186,900 to $224,010.