Berkshire Hathaway Municipal Bond Insurer Wins Top S&P Rating

April 14, 2008

Billionaire Warren Buffett’s new municipal bond insurance company Friday won the top “AAA” rating from Standard & Poor’s Ratings Services, which cited the venture’s nearly $1 billion surplus.

Berkshire Hathaway Assurance Corp. has been granted licenses by 48 states and the District of Columbia.

Standard & Poor’s is the first big credit agency to rate the new bond insurer that Buffett formed, partly at the request of the New York state insurance superintendent.

The $2.6 trillion municipal auction rate market has been rocked by the deep wounds suffered by bond insurers when they expanded into the subprime mortgage area.

Some of Buffett’s competing bond guarantors have been downgraded, and worried investors have sold billions of dollars of municipal debt backed by these companies and some of their rivals, which also were caught up in the subprime nightmare.

This has left some U.S. states, cities and agencies eager for a new insurer with a top-notch rating. Investors, who do not want any more bonds from insurers they deem tainted, also are keen on having a new and solid company.

S&P said its rating on the new Berkshire Hathaway Assurance also reflects a guaranty by Buffett’s Columbia Insurance Co. that extends Columbia’s “AAA” rating to the new insurer.

Columbia is a wholly owned indirect subsidiary of Berkshire Hathaway Inc., which also enjoys S&P’s top rating.

Ever since Buffett announced he would enter the bond insurance business, regulators, politicians and investors have debated whether municipal bonds need insurance and how much of the market the new company might win. Until the turmoil began last summer, about half of all munis were insured.

Controversy also has erupted over the long-standing practice of credit agencies using dual rating systems for munis and corporate bonds. The policy favors debt sold by companies, though it has a higher default rate.

This has prompted some states, led by California, to demand that municipal bonds be rated the same way as corporate debt, a shift that could lead many credits to be raised. That in turn could lessen the demand for backing municipal bonds with insurance, portfolio managers say.

Standard & Poor’s, in its statement on Friday, also cited the unusual strengths of Berkshire Hathaway Inc.

“The rating on Berkshire Hathaway Inc is based on its extremely strong competitive position, insurance and reinsurance capitalization, and financial flexibility,” the credit agency said. It added the insurer was “one of the few holding companies with insurance and reinsurance operations that maintain pricing power.”

(Editing by Leslie Adler)

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