Berkshire Hathaway Assurance Co. was formed during the struggles of MBIA and Ambac to insure the bonds of municipalities and states. At the time it was seen as a brilliant way for Berkshire to take advantage of its stellar credit rating to grab a large share of a relatively safe business.
But as Barron's points out, "cash-strapped cities and states have been forcing premiums down." Warren Buffett never takes on a risk that he doesn't get well compensated for, and he's apparently decided that municipal bond insurance isn't a good bet at these premium levels.
Barron's writes that Assured Guaranty (AGO) has emerged as the dominant player in the municipal bond insurance market.
Buffett-watchers shouldn't be too surprised by this news. Buffett wrote in his last annual letter to shareholders that BHAC was being "very cautious about the business we write" and that Berkshire regards it as "far from a sure thing that this insurance will ultimately be profitable for us."
Buffett went on to explain that though default rates on tax-exempt bonds have historically been extremely low, things could be different during these challenging fiscal times. Cities whose bonds are insured might leave the far-away insurer holding the bag rather than impose additional taxes on the local residents.
About the author:
Mr. Huebscher is the founder and CEO of Advisor Perspectives, a web site and newsletter that provides investment strategy analysis for financial advisors and wealth managers. In 1982, he founded the investment software division of Thomson Financial, where he created the PORTIA product, a portfolio management system for institutional investors. In 1990, he founded Hub Data, a market data redistribution service, which he sold to Advent Software in 1998. He has also worked in the account aggregation field, as a consultant to both vendors and wealth managers. He is a graduate of the Harvard Business School (1982) and Connecticut College (1976).