Saturday, December 29, 2007

NEW YORK (AP) — Town governments, school districts and other municipalities looking to borrow money got a new option yesterday when trying to insure their bonds: billionaire investor Warren Buffett.

Mr. Buffett”s formation of a bond-insurance company provided some validation to an industry that has been battered by fears of collapse in recent weeks.

“If I was thinking of investing in financial guarantors, this would give me comfort,” said Donald Light, a senior analyst with Celent. Mr. Light owns shares of Mr. Buffet”s Berkshire Hathaway.

Although analysts said the move by Mr. Buffett provides a stamp of approval for the broader business model, which has recently come under fire, shares of Mr. Buffett”s newest competitors were hammered yesterday.

“Any capital new to the space for reinsurance would be a net positive,” said Steve Stelmach, an analyst with Friedman, Billings, Ramsey & Co. But if Mr. Buffett “uses capital simply as competition, it is a negative,” Mr. Stelmach said.

MBIA Inc. fell 15.9 percent to close at $18.74 yesterday, while Ambac fell 13.8 percent to $25.12. Earlier in the session, MBIA shares hit a 52-week low of $18.43.

The New York Insurance Department expedited the licensing for Berkshire Hathaway Assurance Corp. The state”s insurance superintendent said the state was doing what it could to help insurers win regulatory approvals needed to keep their businesses going.

Mr. Buffett”s foray into the bond insurance sector comes at a tumultuous time for his new competitors. In recent weeks, bond insurers have come under fire as rating agencies have downgraded them, or warned of possible downgrades, because of their exposure to the deteriorating credit markets.

Standard & Poor”s downgraded ACA Capital Holdings Inc.”s bond insurance unit to “CCC” from “A” on Dec. 19, while Fitch Ratings has placed two of the largest bond insurers, MBIA and Ambac, on negative credit watch.

Typically, bond insurers carry better credit ratings than bond issuers like local governments, allowing the issuers to receive more favorable interest rates on their debt. That in turn, allows the bond issuers to pass on the savings to taxpayers.

In this case, though, the rating agencies are worried that the insurers will not have enough capital to cover potential defaults on bonds and debt backed by mortgages, especially subprime mortgages given to customers with poor credit history.

Fitch said both MBIA and Ambac need to find at least $1 billion in additional capital by the end of January or face a downgrade from their current “AAA” ratings, while ACA said in a regulatory filing Thursday that it has ceded some control of its business to a state regulator as it tries to survive being downgraded to junk status.

Bond insurers typically need the “AAA” rating to generate new business, and Berkshire Hathaway”s unit would be expected to receive such a rating. On Dec. 14, Fitch affirmed its “AAA” rating on Berkshire Hathaway.

If Berkshire Hathaway leverages its strength and issues reinsurance to other bond insurers as part of its new business, it could help boost firms like MBIA and Ambac, Mr. Stelmach said. Rating agencies said one of the ways MBIA and Ambac could raise new capital is through reinsurance plans to cover their outstanding books of business.

But, if Berkshire Hathaway provides no reinsurance options and instead just issues insurance on new municipal bonds, the new competition is likely to squeeze out some of the smaller insurers, such as Security Capital Assurance, Mr. Stelmach said.

Also yesterday, Berkshire Hathaway agreed to buy NRG N.V., the reinsurance unit of ING Group, for about $435.7 million in cash.

The sale of NRG to Berkshire Hathaway is expected to close during the first half of 2008. ING is expected to take a loss of about $145.2 million in 2007 related to the sale.

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