A.M. Best Co. has undertaken a rating action on the Government Employees Group (GEICO) which is a group of companies under GEICO Corp., which in turn is a unit of Berkshire Hathaway Inc.'s (BRK.B) wholly owned subsidiary, National Indemnity Company.
The rating action included reiteration of the financial strength rating FSR of A++ and the issuer credit ratings (ICR) of “aaa” of the member companies of GEICO. A.M. Best also retained the ICR of “aaa” as well as the debt rating of “aaa” on $150 million 7.35% senior unsecured debentures, due 2023, of the immediate parent holding, GEICO Corp.
The rating agency acknowledges the vast operational scale of GEICO which primarily writes private passenger automobile insurance, offering coverage to insureds in all U.S. states and the District of Columbia.
The rating agency views favorably GEICO's marketing strategy which deploys a direct response method in which customers apply for coverage directly to the company via the Internet or over the telephone. This is a significant element in the company's strategy which makes it a low-cost auto insurer.
Other strengths of the company that drove the positive rating action include consistent generation of favorable loss experience which signifies its underwriting expertise. The unit has also generated a positive investment income. A combination of both the above factors has enabled the company to maintain a thick capital cushion over the last five years and payout a handsome dividend to its parent.
GEICO also enjoys the direct and indirect benefits from being part of the conglomerate Berkshire Hathaway, which boasted $227.6 billion in stockholders' equity as of the first quarter ended Mar 31, 2014. The unit also maintains a low level of financial leverage and generates healthy cash flow.
Nevertheless, the unit's exposure to a high amount of equity in its investment portfolio and a high percentage of business accruing from 5 states pose concentration risks.
The ratings carry a stable outlook. A.M.Best is unlikely to make any rating change in the near term. A negative rating action, however, may follow in case equity markets behave adversely and the company shows poor underwriting results.
Financial strength and credit ratings, which intend to measure a company's ability to meet policyholder obligations, are important factors affecting public confidence and creditworthiness of a company, and hence its competitiveness. Securing an investment grade debt rating with a stable outlook reflects optimism on the company.
Other stocks
Berkshire Hathaway carries a Zacks Rank #2 (Buy). Other players from the same industry such as Allied World Assurance Company Holdings, AG AWH, AmTrust Financial Services, Inc. AFSI and Aspen Insurance Holdings Ltd. AHL are also worth considering. All these stocks sport a Zacks Rank #1 (Strong Buy).
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