Omaha, Neb.-headquartered Berkshire, a conglomerate that includes GEICO insurance, had 2008 revenues of $107.8 billion and has long been regarded as the bluest of blue-chip stocks. Ironically, the firm holds nearly a 20 percent interest in New York-based Moody's.

The rating firm said at the same time that it was lowering ratings, it is affirming Berkshire's Prime-1 short-term issuer rating, and the rating outlook for the firm and its insurance units is stable.

Bruce Ballentine, Moody's lead analyst for Berkshire, said in a statement that the rating actions reflected "the impact on Berkshire's key businesses of the severe decline in equity markets over the past year as well as the protracted economic recession."

Moody's reported that at National Indemnity, falling stock prices have reduced the value of an investment portfolio that is heavily concentrated in common stocks, and, in turn, its capital cushion relative to ongoing insurance and investment exposures.

Its analysis found that for some of Berkshire's non-insurance businesses "the recession has caused a meaningful drop in earnings and cash flows, particularly for businesses tied to the U.S. housing market, construction, retailing or consumer finance."

"These extraordinary market pressures have reduced the excess cushion available from National Indemnity and the other affected operations to support potential funding needs of the parent company," said Mr. Ballentine.

Moody's said its rating on National Indemnity, Berkshire's flagship reinsurer, has historically reflected its superior capitalization, which has helped it to attract business and has served as an offset to its relatively high tolerance for underwriting and investment risk.

Moody's noted that National Indemnity's regulatory capital fell by 22 percent during 2008--to $27.6 billion as of year-end--and by "a significant additional amount through early March 2009."

While the rating firm said National Indemnity "still has a robust capital base," it cautioned that it remains exposed to further equity market declines, yielding a credit profile more consistent with the Aa1 rating level.

"Berkshire's long-term issuer rating is a function of the strength of its underlying insurance businesses, led by National Indemnity, as well as the availability of large and diversified cash flows from other owned businesses," said Mr. Ballentine.

Moody's noted that several of Berkshire's non-insurance operations have been negatively affected by the recession with some reporting a drop in earnings during the fourth quarter of 2008. These units are susceptible to continued weakness over the next year or two, Mr. Ballentine added.

"The downgrade of the parent company rating to Aa2 from Aaa reflects the potential for further declines in the support available from these dual sources," he commented.

Other insurance subsidiaries affected by today's rating action include Berkshire Hathaway Assurance Corporation (BHAC), Columbia Insurance Company (Columbia), General Reinsurance Corporation (General Re), and Government Employees Insurance Company (GEICO).

Moody's said it has historically regarded the intrinsic credit profiles of these companies as somewhat weaker than National Indemnity's.

It said the insurance financial strength ratings of these carriers have been based on their intrinsic quality, combined with implicit and explicit support from National Indemnity and Berkshire. Given that the support providers have been downgraded, the other major insurance units have been downgraded to Aa1 from Aaa as well.

Moody's said Berkshire's rating is well supported at the revised level, noting that the company has several businesses that are relatively uncorrelated to the general economy and that continue to perform well. It said these include the diversified utility group under MidAmerican Energy Holdings Company along with certain manufacturing and service businesses.

Moody's noted that Berkshire's insurance segment continues to generate healthy underwriting gains--on average over time--and the firm is reducing its aggregate exposure to natural catastrophes in light of the reduced capital position at National Indemnity.

Other challenges facing the company, said Moody's, include the potential for increased credit losses at Clayton Homes, the manufactured housing lender, although the credit performance remains well above industry norms.

The rating firm said Berkshire is also exposed to heightened volatility in its earnings and capital base related to market value fluctuations within its large portfolio of equity derivatives.

Moody's said four factors could lead to a further downgrade of Berkshire's revised ratings:

o Additional deterioration in the stand-alone credit profile(s) of one or more major operating units.

o A shift toward a less conservative financial profile (e.g., adjusted financial leverage, excluding debt of the utilities and energy, and the finance and financial products sectors, exceeding 10 percent).

o Losses from insurance underwriting, investments and/or derivatives causing a 20 percent decline in shareholders' equity in a given year.

o A material decline in operating cash flows and/or cash and equivalents on hand.

If stand-alone credit profiles of various operating units across the major segments improve, with continued holdings of large cash and equivalent balances at the parent company, then ratings could improve, Moody's said.