Berkshire Bond Insurance

The municipal bond insurance is a wonderful business. Even though municipalities "run on empty" financially, there is always more money to be taken by simply raising taxes. Thus, even though municipalities hardly qualify as AAA based on their financial statements, historically they have paid as AAA because of their "off balance sheet" resources.

The business of insuring their bonds as AAA has been lucrative for MBIA and Ambac as well as others. Typically, property and casualty companies underwrite insurance premiums with the recognition that losses will occur. The bond insurers, on the other hand, underwrite risk that is "zero loss" expected. But the bond insurers expanded their mandate beyond municipal underwriting into securitization underwriting and are experiencing great difficulty.

Rather than take the approach of Davis Selected Advisors (DSA) which is purchasing 5% of MBIA, Berkshire Hathaway (BRK) is creating its own municipal insurance company. In this way, Buffett does not inherit the problems of someone else's underwriting.

There seem to be two powerful lessons here. First, BRK likes to buy existing companies through their Casey Stengel "getting paid for home runs other fellows hit." So, the challenges at MBIA and Ambac do have not enough clarity for Mr. Buffett to make a purchase. Second, the municipal bond insurance business is as good as it looks.