Buffett Rapidly Grows His New Municipal Insurance Arm

February 25, 2008

One of Warren Buffett’s newest businesses — insuring municipal bonds — is expanding rapidly into a troubled field as the company backed 112 issues in just the past two days, according to Moody’s Investors Service.

“I think it’s rapid growth. The fact is, he’s starting from zero. Whether he’s going to be insuring as many on a weekly basis, I don’t know,” said Lee Epstein, chief executive officer of Money Market One, a San Francisco-based investment dealer.

Berkshire Hathaway Inc. only started insuring municipal bonds in late December, and it is one of the few bond insurers that can offer borrowers and investors an unblemished top rating of “AAA.”

Rating agencies have already cut or warned they may downgrade insurers that guarantee principal and interest on about $1.6 trillion of municipal debt because the companies face billion-dollar claims from insuring subprime mortgage-related securities.

A Moody’s spokesman last Thursday had no further details about what kinds of muni bonds or how much debt the Buffett’s new insurer is backing.

“We have rated approximately 112 Berkshire Hathaway Assurance Corp-insured issues between yesterday and today,” the spokesman said.

A Berkshire Hathaway spokesman was not immediately available.

In January, Berkshire Hathaway’s insurer backed its first municipal bonds, choosing about $10 million of New York City debt for its debut in the secondary market.

Earlier this month, Buffett unveiled an ambitious plan to catapult into the top ranks of municipal bond insurers though it met with little enthusiasm.

The billionaire investor, known for his ability to spot a bargain, offered to reinsure $800 billion of muni bonds backed by his embattled rivals.

Buffett’s plan was limited to his competitors’ safest business — muni bonds whose default rate is less than 1 percent. This would have left the companies saddled with their riskiest and potentially toxic subprime policies.

Increasingly, municipal borrowers are skipping the insurance they once relied on because it made their debt easier to sell by sparing investors from having to do in-depth research. However, now bonds backed by rickety insurers are seen as tainted and trade at discounts.

Only 15 percent of new muni bonds have been insured this month, according to Merrill Lynch. That was a sharp fall — for the past 10 years or so about half of all munis were insured.

Three of the most troubled insurers — MBIA Inc, Ambac Financial Group and FGIC Corp — have all lost market share to more credit-worthy rivals, financial analyst say.

Only two other insurers, Financial Security Assurance and Assured Guaranty Corp., have “AAA” ratings with stable outlooks. They were the only insurers to guarantee new muni deals this month, according to Merrill Lynch.

FSA has insured 2,229 muni issues so far this month. Its much smaller competitor, Assured Guaranty, backed about 667 issues, Merrill added.

Buying the insurance from Berkshire Hathaway’s new insurer lifted the muni credits to a “AAA” rating, Moody’s said.

Though the credit agency has not yet rated the new insurer, its guarantees are backed with a contingent payment insurance policy provided by AAA-rated and Berkshire-owned National Indemnity Co, Moody’s said.

That justifies the highest rating on bonds Berkshire insures, the rating agency explained.

(Reporting by Anastasija Johnson and Joan Gralla; Editing by Tom Hals)

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