Municipal bond insurer Berkshire Hathaway Assurance Corp. garnered little attention in Warren Buffett’s annual letter to the shareholders of parent company Berkshire Hathaway Inc.
BHAC, launched in December 2007, wrote just $40 million in premiums last year, compared with $595 million the year before. This was “a result of changing market conditions and demand,” said the company’s annual report, also released Saturday.
The guarantor lost its only triple-A rating early last month when Standard & Poor’s downgraded the parent company and its affiliates to AA-plus due to its “high risk tolerance for capital volatility.” The rating came with a stable outlook, as does its Aa1 rating from Moody’s Investors Service.
Ajit Jain, who runs BHAC, also declined to say much in an early February interview. “Unfortunately, we can’t get the pricing that we’re looking for and there are all kinds of reasons why, but we don’t find the economics of the business attractive enough to be able to justify risking capital so, you know, we haven’t been doing much,” he said.
In last year’s letter, Buffett struck a cautious tone in his discussion of muni bond insurance. He argued that reliance on historically low default rates was misleading as the data dealt primarily with an uninsured market. With insurance in the picture, he said municipalities would have less incentive to make concessions and could instead force the insurers to pony up.
“When faced with large revenue shortfalls, communities that have all of their bonds insured will be more prone to develop 'solutions’ less favorable to bondholders than those communities that have uninsured bonds held by local banks and residents,” he wrote last year. “If a few communities stiff their creditors and get away with it, the chance that others will follow in their footsteps will grow.”
Buffett made one other mention of municipals in his chairman’s letter Saturday.
“We told you last year that very unusual conditions then existed in the corporate and municipal bond markets and that these securities were ridiculously cheap relative to U.S. Treasuries,” he wrote.
“We backed this view with some purchases, but I should have done far more. Big opportunities come infrequently. When it’s raining gold, reach for a bucket, not a thimble.”
