S&P Global Ratings has revised its outlook of the operating insurance subsidiaries of Warren Buffett’s Berkshire Hathaway from negative to stable, due to improved capitalisation.
The revision incorporates S&P’s view that Hathaway’s insurance subsidiaries will maintain combined capital adequacy that is redundant at the AA confidence level on a prospective basis, and a very strong capital and earnings profile that supports its ratings.
S&P changed its outlook to negative in September 2017 due to uncertainty regarding the level of capital build-up necessary to offset a material increase in risk exposure owing to significant organic growth, a large amount of retrospective reinsurance, and corresponding growth in loss reserves and invested assets.
However, the capital position as of year-end 2017 was stronger than expected due to good earnings, despite underwriting losses and large unrealised capital gains that drove a significant increase in statutory surplus.
As a result, the capital metrics at Hathaway’s insurance subsidiaries not only remained in line with S&P’s expectation for the ratings, they also strengthened on a relative basis year-over-year.
Considering exposure to property-catastrophe and long-tail business lines, the large amount of equity holdings, and Hathaway’s acquisitive strategy, its insurance subsidiaries’ capitalisation is subject to volatility.
However, S&P expects earnings accrual to help build up capital to sustain the current level of capitalisation.