A.M. Best Keeps Ratings Unchanged At Berkshire Unit - Analyst Blog

A.M. Best Co. has undertaken a rating action on a number of units under North American Casualty Group (“NAC”)  – a group of companies under Applied Underwriters, Inc. – which in turn is a unit of Berkshire Hathaway Inc.'s (BRK.B) wholly owned subsidiary, National Indemnity Company.

The rating action includes reiteration of the financial strength rating FSR of A+  and the issuer credit ratings (ICR) of “aa-” of the member companies of  NAC including California Insurance Company, Continental Indemnity Company, Illinois Insurance Company and Pennsylvania Insurance Company.

The rating agency acknowledges the vast operational scale of NAC units which primarily write workers' compensation insurance.

Strengths of the company that drove the positive rating action include consistent generation of operating profitability which testifies to its seasoned management team. The company also boasts disciplined pricing and reserving philosophy. It has strong strategic plans in place, which would translate to long-term earnings growth.

NAC also enjoys 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.

Nevertheless, a cause of concern for the rating agency is the unit's limited operating performance, and high business and concentration risk due to its specialization in writing significant workers' compensation business, that too within a limited geographic area. Though this geographic concentration exposes the company to heightened regulatory, judicial, legislative and competitive risks, the rating agency positively views the company's flexibility to deal with new changes.

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 the capital position weakens and operating profitability degrades down to a level which is not supported by the ratings.

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).