Berkshire Hathaway rating outlook shifted to ‘negative’

S&P Global Inc. revised its outlook for Berkshire Hathaway Inc.’s insurance operations to negative from stable on Monday.

The New York-based rating agency said the move reflected uncertainty over the insurers’ earnings and capital changes, in part due to the large amount of retroactive reinsurance business Berkshire Hathaway has written this year, an S&P statement said.

S&P affirmed its AA+ financial strength rating of Berkshire Hathaway’s insurance units, which include National Indemnity Co., Government Employees Insurance Co., or GEICO, and General Reinsurance Corp.

“The negative outlook is based on some uncertainty pertaining to the level of capital build-up necessary over the next one-to-two years to offset a material increase in risk exposure,” S&P said.

The extra capital will be needed as Berkshire Hathaway is showing “robust” organic growth and continues to write a large amount of retroactive reinsurance, which covers past losses of ceding insurers.

“The negative outlook reflects a one-in-three chance of a downgrade. Under our base-case scenario, we expect that the insurance operating companies will attain a very strong capital and earnings position supported by an extremely strong competitive position and strong earnings-generation capability in the next two-to-three years,” the S&P statement said.

Berkshire Hathaway has dominated the retroactive reinsurance sector for more than a decade. Earlier this year, it made one of its biggest and high-profile deals when it agreed to reinsure $20 billion of American International Group Inc.’s long-tail liabilities.