Fitch Affirms IDR of Berkshire Hathaway (BRK-A) at 'AA-'; Ratings Supported by Market Position, Strong Capitalization

Fitch Ratings has affirmed the 'AA-' Issuer Default Rating of Berkshire Hathaway Inc. (NYSE: BRK) and the 'AA+' Insurer Financial Strength Ratings on BRK's key insurance subsidiaries. The Rating Outlook is Stable. A complete list of ratings and rating actions is shown at the end of this release.

KEY RATING DRIVERS:

Fitch's ratings for BRK are supported by extremely strong capitalization and market position of its insurance subsidiaries, solid operating performance with good diversification across business lines, and excellent financial flexibility and liquidity.

Also considered in the ratings are material equity market risk, insured natural catastrophe exposures, growing exposure to asbestos and environmental risk and various issues associated with the company's acquisition strategy.

BRK's 'Large' market position in the property/casualty insurance sector, with annual premiums in excess of $42 billion and combined statutory surplus of approximately $130 billion are consistent with Fitch's 'AA' IFS rating category.

The capitalization of BRK's insurance operations is considered 'Extremely Strong' measured by Fitch's Prism capital model and is heavily weighted in the company's current rating.

BRK's consolidated financial leverage ratio was 25.6% as of March 31, 2015. This ratio includes nearly $57 billion of debt attributable to BRK's Railroad, Utilities and Energy business. Fitch expects these major non-insurance businesses will service their own debt.

An alternate calculation of BRK's financial leverage ratio, using holding company debt and debt issued by the finance operations and guaranteed by BRK, was 14.9% at March 31, 2015. The agency views BRK's ability to fund finance operations at a low cost as an important competitive advantage for the finance operations and also notes that much of the finance company debt is guaranteed by BRK.

Consolidated interest coverage for the first quarter of 2015 (1Q15) was 8.1x excluding realized investment gains, which is below Fitch's expectations of 12x for companies at BRK's rating level. An alternate calculation of interest coverage, excluding railroad, utilities and energy, was 17.2x during the first three months of 2015 and is consistent with the current rating category.

BRK reported net income of $5.2 billion for the first three months of 2015, up from $4.7 billion in the comparable period of 2014. BRK's insurance group reported $1.8 billion in earnings before tax in 1Q15, accounting for nearly 30% of BRK's $6.3 billion in pre-tax earnings allocated to operating segments.

Burlington Northern and Santa Fe (BNSF) railroad operation continues to make significant contributions to earnings. BNSF reported a pretax gain of $1.7 billion for the first three months of 2015, up materially from $1.2 billion in the comparable period in 2014. BNSF's profitability will likely be squeezed as the company plans to spend $6 billion or more than one-quarter of estimated revenues on plant and equipment during 2015.

BRK's annualized return on equity was 8.6% for 1Q15, excluding unrealized gains on fixed income securities, which was level with the full-year 2014 results.

BRK's GAAP basis earnings will continue to be exposed to earnings volatility given the large notional values and long duration of BRK's outstanding derivative contracts. Additionally, Fitch believes that BRK's earnings will be exposed to potential volatility from the company's reinsurance businesses and its exposure to catastrophe-related losses as well as the company's large equity investment portfolio.

BRK has grown its asbestos & environmental insured liability exposure over the past several years to $14.4 billion as of Dec. 31, 2014. Most of this liability, $12.7 billion, was added through retroactive reinsurance contracts, most notably with Equitas Limited, Swiss Re, CNA Financial Corp, AIG and Liberty Mutual. In 2014, a reserve strengthening in retroactive reinsurance policies generated an underwriting loss of $905 million, worsening from a $321 million loss in 2013.

RATING SENSITIVITIES:

Key rating triggers that could lead to a future downgrade include:

--Deterioration in the credit quality of key insurance subsidiaries (National Indemnity, GenRe, and GEICO) that is no longer consistent with the current 'AA+' rating. Measures of credit quality include Fitch's judgment of capitalization, a total financing and commitments ratio greater than 1.5x, net leverage (excluding affiliated investments) over 3.5x or a sharp and persistent reduction in underwriting profits.
--A consolidated run-rate debt-to-total capital ratio that exceeds 30% or a run-rate debt-to-total capital ratio from the holding company, insurance and finance operations (including debt issued or guaranteed by the holding company) that exceeds 25%.
--Material increases in leveraged equity market exposure such as its in its equity index put derivative portfolio.
--Acquisitions or other actions that reduce outstanding cash below $10 billion or approximately 5x consolidated interest expense.

Key rating triggers that could lead to an upgrade include:

A commitment to lower debt-to-tangible capital ratios attributed to the holding company, insurance, and finance operations. Fitch believes that this would likely require the scaling back of the finance operations.

Fitch has affirmed the following ratings:

Berkshire Hathaway, Inc.
--Issuer Default Rating (IDR) 'AA-'.
--$300 million 0.8% senior notes due Feb 2016 'A+';
--$750 million 2.20% senior notes due Aug. 2016 'A+';
--$1.1 billion 1.9% senior notes due Jan. 2017 'A+';
--$800 million 1.55% senior notes due May 2018 'A+';
--$750 million 2.1% senior notes due Aug. 2019 'A+';
--$500 million 3.75% senior notes due Aug. 2021 'A+';
--$600 million 3.40% senior notes due Jan. 2022 'A+'
--Euro 750 million 0.75% senior notes due March 2023 'A+';
--$500 million 3.0% senior notes due May 2023 'A+';
--Euro 1.25 billion 1.125% senior notes due March 2027 'A+';
--Euro 1 billion 1.625% senior notes due March 2035 'A+';
--$1 billion 4.5% senior notes due May 2043 'A+'.

Berkshire Hathaway Finance Corporation (BHFC)
--IDR 'AA-';
--$500 million 2.45% senior notes due Dec. 2015 'A+';
--$1 billion 0.95% senior notes due Aug. 2016 'A+';
--$400 million floating rate senior notes due Jan. 2017 'A+';
--$650 million floating rate senior notes due Jan. 2017 'A+';
--$1,350 million 1.6% senior notes due May 2017 'A+';
--$400 million floating rate senior notes due Aug. 2017 'A+';
--$600 million floating rate senior notes due Jan. 2018 'A+';
--$1.25 billion 5.4% notes due May 2018 'A+';
--$500 million 2.0% senior notes due Aug. 2018 'A+'
--$500 million 1.3% senior notes due May 2018 'A+';
--$550 million 2.9% senior notes due Oct. 2020 'A+';
--$750 million 4.25% senior notes due Jan. 2021 'A+';
--$775 million 3.0% senior notes due May 2022 'A+';
--$750 million 5.750% senior notes due Jan. 2040 'A+';
--$725 million 4.4% senior notes due May 2042 at 'A+';
--$500 million 4.3% senior notes due May 2043 'A+'.

GEICO Corporation
--IDR 'AA-';
--$150 million 7.4% senior notes due July 15, 2023 'A+'.

General Re Corporation
--IDR 'AA-'.
--$500 million commercial paper program 'F1+';
--Short-term IDR 'F1+'.

Fitch affirmed the following insurance subsidiaries that carry an 'AA+' Insurer Financial Strength:

--Government Employees Insurance Company;
--General Reinsurance Corporation;
--General Star Indemnity Company;
--General Star National Insurance Company;
--Genesis Insurance Company;
--National Indemnity Company;
--Columbia Insurance Company;
--National Fire and Marine Insurance Company;
--National Liability and Fire Insurance Company;
--National Indemnity Company of the South;
--National Indemnity Company of Mid-America;
--Wesco Financial Insurance Company.

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