Omaha, Neb.-headquartered Berkshire, a conglomerate that also includes non-insurance operations, 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 the rating outlook on the revised ratings is stable.

Bruce Ballentine, Moody's lead analyst for Berkshire, said in a statement that the rating actions “reflect 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,” Mr. Ballentine said.

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 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,” Mr. Ballentine said.

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 for fourth-quarter 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.

Commenting on the other insurance and reinsurance subsidiaries impacted by last week's action, 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 parent company Berkshire include the potential for increased credit losses at Clayton Homes, the manufactured housing lender. The rating firm said Berkshire is also exposed to heightened volatility in its earnings and capital base related to market value fluctuations within a large portfolio of equity derivatives.

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

o Additional deterioration in the stand-alone credit profiles of one or more major operating units.

o Losses from insurance underwriting, investments, 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.