NU Online News Service, April 9, 11:02 a.m.EDT

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Moody's Investors Service, citing the impact of stock marketdeclines yesterday, downgraded the insurance financial strengthrating of National Indemnity Company and the long-term issuerrating of its ultimate parent, Berkshire Hathaway Inc.

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National Indemnity was dropped to Aa1 from Aaa, and Berkshire toAa2 from Aaa.

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The rating agency has also downgraded the insurance financialstrength ratings of Berkshire's other major insurance subsidiariesto Aa1 from Aaa.

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

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

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Bruce Ballentine, Moody's lead analyst for Berkshire, said in astatement that the rating actions reflected "the impact onBerkshire's key businesses of the severe decline in equity marketsover the past year as well as the protracted economicrecession."

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Moody's reported that at National Indemnity, falling stockprices have reduced the value of an investment portfolio that isheavily concentrated in common stocks, and, in turn, its capitalcushion relative to ongoing insurance and investment exposures.

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

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"These extraordinary market pressures have reduced the excesscushion available from National Indemnity and the other affectedoperations to support potential funding needs of the parentcompany," said Mr. Ballentine.

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Moody's said its rating on National Indemnity, Berkshire'sflagship reinsurer, has historically reflected its superiorcapitalization, which has helped it to attract business and hasserved as an offset to its relatively high tolerance forunderwriting and investment risk.

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

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While the rating firm said National Indemnity "still has arobust capital base," it cautioned that it remains exposed tofurther equity market declines, yielding a credit profile moreconsistent with the Aa1 rating level.

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

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

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"The downgrade of the parent company rating to Aa2 from Aaareflects the potential for further declines in the supportavailable from these dual sources," he commented.

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

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Moody's said it has historically regarded the intrinsic creditprofiles of these companies as somewhat weaker than NationalIndemnity's.

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It said the insurance financial strength ratings of thesecarriers have been based on their intrinsic quality, combined withimplicit and explicit support from National Indemnity andBerkshire. Given that the support providers have been downgraded,the other major insurance units have been downgraded to Aa1 fromAaa as well.

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Moody's said Berkshire's rating is well supported at the revisedlevel, noting that the company has several businesses that arerelatively uncorrelated to the general economy and that continue toperform well. It said these include the diversified utility groupunder MidAmerican Energy Holdings Company along with certainmanufacturing and service businesses.

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

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Other challenges facing the company, said Moody's, include thepotential for increased credit losses at Clayton Homes, themanufactured housing lender, although the credit performanceremains well above industry norms.

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

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

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

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o A shift toward a less conservative financial profile (e.g.,adjusted financial leverage, excluding debt of the utilities andenergy, and the finance and financial products sectors, exceeding10 percent).

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

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

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

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