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Berkshire Hathaway opening bond insurance business, buys insurance unit from ING

Berkshire Hathaway opening bond insurance business, buys insurance unit from ING

Warren Buffett's Berkshire Hathaway will receive a license in New York to open a new bond insurance business, a state regulator said Friday.
The license for Berkshire Hathaway Assurance Corp. will officially be approved no later than Monday.
Also on Friday, Berkshire Hathaway agreed to buy NRG N.V., the reinsurance unit of ING Group said for about $435.7 million (euro296.5 million) in cash.
Buffett's new insurance unit could take some business away from other insurers, said Donald Light, a senior analyst with Celent. Light owns Berkshire Hathaway shares.
Buffett will have the advantage of setting up operations with a strong balance sheet and a clean book of business, making his operation attractive for bond issuers, Light added.
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 Inc. and Ambac Financial Group Inc., on negative credit watch.
The rating agencies are worried 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.
As defaults on mortgages have risen in recent months, rating agencies and investors have worried the bonds and debt backed by the troubled loans will begin defaulting as well, triggering payments by the insurers _ which they ultimately might not have enough cash to cover.
Fitch said both MBIA and Ambac need to find at least $1 billion (euro680 million) 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 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.
The new business opened by Berkshire Hathaway, though taking business away from competitors, could be a boost for those needing to find new investors, Light said.
"If I was thinking of investing in financial guarantors, this would give me comfort," Light said.
Though analysts hailed Buffett's move as good news for the industry, MBIA and Ambac shares dropped sharply. MBIA fell 12 percent to $19.60 in morning trading, while Ambac fell 9.7 percent to $26.31.
Municipal issuers _ like hospitals, school districts and sewer systems _ often seek out bond insurance as a way to lower their cost of borrowing and make their issues more attractive to investors. The troubles of late with ACA, MBIA and Ambac have led to speculation that more issuers will simply forgo insurance and pay the higher costs necessary to come to market without it.
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 (euro99 million) in 2007 related to the sale.


Updated : 2021-01-18 12:46 GMT+08:00