Buffett Says Bond Insurance Pricing Inadequate

May 4, 2009

Berkshire Hathaway Chairman Warren Buffett says the company’s young bond insurance unit has not been writing much new business because pricing has been inadequate to cover the risk of losses.

“We basically do not like the pricing” we would receive for providing coverage, he said, on the sidelines of a press conference in his hometown of Omaha.

Berkshire Hathaway Assurance Corp, or BHAC, which was formed more than a year ago, is one of the few highly rated bond insurers, after other companies were hit by losses.

“We have written some business, and we’ll write more tomorrow if the price is right,” he added. “It depends what the competition is doing.”

Bond insurance buyers seek out highly rated insurers because the coverage can raise the perceived creditworthiness of the debt, and thereby reduce costs. The insurers in turn make payment guarantees in the event of default.

BHAC was formed after rivals such as MBIA Corp and Ambac Corp ventured into guaranteeing structured finance, resulting in losses and eventual rating cuts.

Although Berkshire recently lost its triple-A ratings from Moody’s Investors Service and Fitch, Buffett said that has not affected its bond insurance business.

BHAC has focused on selling coverage for municipal bonds, which has not had the same losses as structured bonds.

MBIA and Ambac, stripped of their high ratings, are each trying to set apart their stronger municipal insurance units in hopes of getting high ratings for them.

“We would never dream of doing that,” said Buffett, adding “because people would get burned.”

Angry investors, counterparties and banks have filed lawsuits against MBIA because of the plans, and complained to New York Insurance Superintendent Eric Dinallo, MBIA’s regulator.

“That probably will be for insurance departments and courts to settle,” said Buffett.

He said he would never pursue a similar course of action with any Berkshire companies. “We will keep all promises.”

(Reporting by Jonathan Stempel and Lilla Zuill; Editing by Richard Chang)

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