Buffett’s Bond Success
Karen Richardson reports from the Berkshire Hathaway annual meeting.
Starting up a municipal-bond insurance is as close to a no-brainer as business gets, if Warren Buffett’s experience is any guide.
His new four-month-old municipal-bond insurance business, Berkshire Hathaway Assurance Corp., racked up premium volume in the first quarter of more than $400 million, which Mr. Buffett said wasn’t only bigger than that of its biggest competitor, but possibly more than all of the premium volume of all of its rivals combined.
“This whole company has been built in just a couple of months,” Mr. Buffett said, adding that the fledgling company completed 278 transactions. “And that’s from a standing start.”
Defying critics who said the start-up didn’t have the expertise, track record or infrastructure to gain market share or a triple-A rating, Berkshire has managed to win both. Mr. Buffett credited Ajit Jain, his chief of insurance, and ” his small office of 29 or 30 people who are doing other things too.”
Most of Berkshire’s business to date has involved re-insuring municipal bonds in the secondary market that were already insured by some of the triple-A-rated bond insurers. Issuers have been agreed to pay more — up to double price of their initial insurance — for the benefit of seeing their bonds trade at lower, or safer, yields. The company has also won some new primary-market deals, including policies for Detroit sewer bonds.
Buffet has some ’splaining to do.
Excerpt from Reuters May 2:
“Billionaire investor Warren Buffett’s Berkshire Hathaway (BRKa.N: Quote, Profile, Research) is being examined as part of the Connecticut Attorney General’s probe into conflicts of interest in the credit rating industry, the Financial Times reported on Friday.
Connecticut Attorney General Richard Blumenthal is investigating how credit rating agencies grade the risk of municipal bonds. He has joined other state officials in calling for changes at a House of Representatives committee hearing.
Blumenthal told the FT that Berkshire’s ownership of 19.5 percent of Moody’s, which issued a top rating to Berkshire’s new bond insurance business, “certainly creates an appearance of a conflict of interest”.”
buffet’s structure of ownership is ridiculous. it’s the equivalent of Enron owning a 19.5% interest in AA. it does, however, provide a nice hook for veil piercing.
Conflict of interest… you think? How does Moody’s get off rating anybody!
Berkshire has financial strength unmatched in the insurance industry; THAT is why they received the rating. BRK bought their Moody’s stake in the open market a few years ago and has made no effort to influence the company in any way.
Connecticut’s Attorney General should spend taxpayer’s money investigating a perceived oonflict of interest between Berkshire and Moody’s. It would be good for Americans to learn that after thorough unbiased review Berkshire has clearly done nothing whatsoever to “force” an unwarrented rating from Moody’s. Every once in a while its good to have a government verify that it is possible for a company to succeed on merit not on its relationships.
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