Buffett's New Bond Insurer May Staff Up

A strong new player entered the bond insurance industry last week, which could mean the beleaguered sector will see some hiring soon.

However, the surprise move by billionaire investor Warren Buffett could also lead to cutbacks by existing bond insurers such as MBIA, Ambac, Financial Guaranty Insurance Corp. and XL Financial Assurance. With a powerful new rival in the picture, those firms will likely face higher hurdles to raising the additional capital they need to stay viable.

"The recent launch of Berkshire Hathaway Assurance Corp., initially capitalized to write up to $16 billion of new business, has inevitably opened up the employment potential for experts focused on delivery of an undoubted AAA product to the municipal market place," said Amanda Atkins, chief executive of Afinia Capital, in an email to eFC. Afinia Capital is a London-based firm that helps insurers and reinsurers manage their balance sheets.

On the other hand, Atkins says staffers concerned that recent negative rating outlooks will damage existing bond insurers, "will undoubtedly find opportunities limited in what will almost certainly be another streamlined Berkshire operation." She points out that the two industry giants, Ambac and MBIA, together insure municipal debt of more than $700 billion while employing less than 1,000 people between them.

MBIA had 492 employees as of February 2007, including 115 in its asset management subsidiary, according to the company's latest annual report. Ambac and its subsidiaries had 359 employees at the end of 2006.

Buffett's Game Plan

Buffett told The Wall Street Journal he is ready to plow "quite a bit of capital" into his newly launched municipal bond insurer, Berkshire Hathaway Assurance Corp. The new company was set to receive regulatory approval to do business in New York state as of Dec. 31. It has devoted $105 million in capital to its prospective operation there.

That's just the beginning. Next up are California, Puerto Rico, Texas, Illinois and Florida. Together with New York, those states account for the lion's share of municipal debt sold in the U.S. "Ideally we'd be licensed in every state, but there's a limit to what we can do," Buffett told the Journal. He said the business could end up being "tiny, ...(or) very large." He added that parent Berkshire Hathaway Inc. is prepared to commit "quite a bit of capital if we like the business."

There's no word on staffing plans for the new unit, but it's a good bet Berkshire Hathaway's financial strength will let it grab market share from the troubled rivals who currently dominate the bond insurance business. These so-called "monoline" insurers face a palpable threat of losing their principal business asset - their triple-A ratings - due to mounting losses from various mortgage-related and other structured bonds they also insure. In contrast, Berkshire Hathaway enjoys a secure triple-A rating that will flow through to its new subsidiary.

Berkshire will stick with municipals and won't "stray" into structured products, Buffett said.

Through August 2007, state and local governments and related agencies issued about $290 billion in long-term bonds. The credit crisis put a damper on new issuance thereafter. Meanwhile, prices of outstanding municipal bonds have been hurt by both wider risk premiums for bonds in general, and more specific worries that hundreds of billions of dollars worth of insured munis could lose their top credit rating if one or more big monoline insurers do. As a result, industry observers expect Berkshire's entry to be warmly received by both borrowers and investors in municipal bonds.