Struggling Bond Insurers Get New Rival: Warren Buffett

NEW YORK, Dec. 28 -- Warren E. Buffett's Berkshire Hathaway is entering the bond insurance business in a move that could lower borrowing costs for local governments having a hard time raising money during the credit crunch.

The new insurer, to be called Berkshire Hathaway Assurance, is expected to receive a license to operate in New York by Monday, the state's insurance department said Friday.

Buffett, the billionaire investor, is launching the business as many of the established firms face uncertainty because of their exposure to complicated debt instruments that have been roiling financial markets.

Shares of some of the biggest bond insurers have been pummeled in recent months as rating agencies scrutinize the insurers' ability to cover potential defaults on the mortgage-related bonds they insure, particularly those backed by loans to home buyers with poor credit.

Last week, Standard & Poor's downgraded ACA Financial Guaranty because of its cash shortfall, and Fitch Ratings warned that MBIA and Ambac Financial Group, the two largest bond insurers, could also be downgraded.

A good credit rating is essential for bond insurers, which play a critical role in the capital markets by helping companies and local governments with imperfect credit borrow money at low interest rates to finance things like ballparks, buildings and roads. Bond insurers can do that because they essentially transfer their top credit ratings to the bonds of companies, states and municipalities by issuing insurance. Without the backing of top-rated bond insurers, companies and local governments would have to pay more for projects.

While Buffett's new business is not yet rated, analysts said it is almost certain to receive the top rating, AAA. Berkshire Hathaway, with its strong balance sheet, is a AAA-rated entity.

Buffett's entry into this business was reported by the Wall Street Journal on Friday. He told the paper that the company would seek permission to operate in California, Puerto Rico, Texas, Illinois and Florida, which have high volumes of municipal-debt issuance. He said the company would stay away from insuring complicated structured products such as bonds backed by mortgages and credit card receipts.

Such an approach, some analysts said, would make his company appealing to investors and debt issuers.

"Buffett's entry into the bond insurance market may be encouraging for cities and counties issuing bonds because there is now a triple-A competitor that is starting on solid footing and does not have exposure to mortgage problems," said Randy Smolik, chief municipal bond market analyst for Thomson Financial.

Berkshire Hathaway Assurance would provide added competition in a marketplace that has a limited number of insurers free of mortgage problems, Smolik said.

Buffett, a director of The Washington Post Co., did not return a phone call seeking comment Friday.

Under the license to be issued by the New York State Insurance Department, Buffett's new company would be authorized to write insurance policies for municipal bonds.

"Having new entrants in the market to provide municipalities with options to enhance the credit of new bonds or to potentially provide enhanced credit for outstanding downgraded bonds is a very positive development," Eric R. Dinallo, the state's superintendent of insurance, said in a written statement. He added: "We welcome Mr. Buffett and his organization to this marketplace."

The license was processed and approved in a month, the fastest approval of its type, and reflects the department's response to concerns in the market, department spokesman Andrew Mais said.

"We stand ready to expedite the approval process for new entrants as well as any regulatory approvals current guarantors may need in order to secure additional capital," he said.

Analysts said Buffett's new company was likely to take market share from competitors, and shares of major bond insurers fell Friday. Ambac shares lost nearly 14 percent to close at $25.12. MBIA shed almost 16 percent, to $18.74.

Also Friday, Berkshire Hathaway agreed to buy NRG, the reinsurance unit of ING Group, the biggest Dutch financial services company, for about $436 million.