Buffett starts up bond insurer to rival MBIA, Ambac
NEW YORK (Reuters) - Warren Buffett's Berkshire Hathaway Inc (BRKa.N) (BRKb.N) is starting a bond insurer that would help state and local governments lower their borrowing costs, and 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 on Friday, department spokesman David Neustadt said.
Buffett's entry puts pressure on the largest bond insurers, MBIA Inc (MBI.N) and Ambac Financial Group Inc (ABK.N), whose shares sank a respective 15.9 percent and 13.8 percent after Buffett revealed his plans. MBIA shares touched a 13-year low.
Credit rating agencies are reviewing their ratings on concern they won't be able to cover losses on bonds they guarantee. Berkshire has "triple-A" ratings, and expects the new unit to earn the same rating. It plans to expand the unit into California, Florida, Illinois, Texas and Puerto Rico.
"Berkshire provides the municipal finance industry with a lifeline," said Sean Egan, head of the ratings desk 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 did not return requests for comment. The Wall Street Journal earlier reported the creation of the new Berkshire unit.
Issuers welcomed Buffett's foray into the bond insurance industry, whose members guarantee about $2.5 trillion of debt.
"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."
MBIA shares closed $3.53 lower at $18.74, after earlier falling to $18.43, their lowest since December 1994. Ambac shares fell $4.02 to $25.12. The shares are down a respective 74 percent and 72 percent this year. Berkshire's Class A shares rose $3,300 to $141,100.
Separately, Omaha, Nebraska-based Berkshire agreed a deal to buy the NRG NV reinsurance unit of ING Groep NV (ING.AS) (ING.N) for about 300 million euros ($442 million). The Dutch bank expects to take a 100 million-euro ($147 million) loss from the sale, set to close in the first half of 2008.
RIVALS FACE PRESSURE
Municipal issuers finance such things as hospitals, road construction, schools, sewer systems and sports facilities.
They often seek bond insurance to reduce the perceived risk of owning their debt. That can attract more investors, resulting in lower borrowing costs and saving taxpayers money.
"We can't guarantee everything, and we will not take risk beyond what's prudent for us," Buffett said in an interview with the Journal.
He said he capitalized the new business at $105 million and will commit "quite a bit of capital if we like the business," but maintain "a capital ratio that's stronger than anybody's." Continued...
