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Buffett's firm moves to insure municipal bonds

December 29, 2007|From Reuters

Warren Buffett's Berkshire Hathaway Inc. is starting a municipal-bond insurer that is likely to lure business from established rivals struggling with credit market turmoil.

The new insurer, Berkshire Hathaway Assurance Corp., received a license to operate from New York state's insurance department Friday, a department spokesman said.

Buffett's entry puts pressure on the largest bond insurers, MBIA Inc. and Ambac Financial Group Inc., whose shares sank 16% and 14%, respectively, after Buffett revealed his plans.

Credit-rating firms have been reviewing their ratings on MBIA, Ambac and other bond insurers because of concern they will be unable to cover losses on mortgage-related securities that they guarantee.

Berkshire has AAA ratings, and expects its new unit to earn the same rating. Buffett told the Wall Street Journal that the unit would maintain "a capital ratio that's stronger than anybody's."

"We can't guarantee everything, and we will not take risk beyond what's prudent for us," he said.

The company plans for the unit to expand into California, Florida, Illinois, Texas and Puerto Rico.

"Berkshire provides the municipal finance industry with a lifeline," said Sean Egan at Egan-Jones Ratings Co. in Philadelphia. "The industry will be able to turn to a truly triple-A credit. Many investors are likely to demand that bonds are backed by Berkshire."

MBIA and Ambac failed to respond to requests for comment.

Municipal bond issuers, which have about $2.5 trillion of insured debt outstanding, welcomed Berkshire's move.

"The more the merrier," said David Bryant, treasurer at the Chicago Board of Education. "The more price competition and credit quality, the better for us."

Municipalities and other government bodies often seek bond insurance to reduce the perceived risk of owning their debt. That can attract more investors, reducing borrowing costs and saving taxpayers' money.

Berkshire owns more than 70 businesses, including auto insurer Geico Corp. and reinsurer General Re Corp. The company said it ended September with $47.1 billion in cash.

Berkshire insurance executive Ajit Jain will run the new Berkshire unit, the Journal said. Analysts consider Jain one of the top candidates to eventually replace Buffett, 77, at the helm of the parent company.

"Berkshire will be a formidable competitor, and take market share," said Rob Haines, senior insurance analyst at CreditSights Inc.

"Its entry is a big vote of confidence in the bond insurance business," Haines said. "It suggests the business remains viable, even with the problems MBIA and Ambac have had."

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