By Josh P. Hamilton and Christine Richard
Dec. 28 (Bloomberg) -- MBIA Inc. and Ambac Financial Group Inc., the two largest bond insurers, fell in New York Stock Exchange trading after billionaire investor Warren Buffett said he plans to start a rival company to guarantee municipal debt.
Ambac dropped as much 15 percent, the most in two months, and MBIA fell as much as 17 percent after Buffett's Berkshire Hathaway Inc. said it plans to insure bonds in New York and at least four other states.
Berkshire, which gets half its profit from insurance, is challenging the bond insurers as they struggle to retain the AAA credit ratings that allow them to guarantee about $1.2 trillion of municipal bonds. MBIA, Ambac and other guarantors are under scrutiny amid concern they don't have enough capital set aside to cover potential losses on bonds they insure that are linked to subprime mortgages.
``Investors might feel more comfortable investing in bonds insured by Buffett than those backed by an insurer with the legacy of the credit crisis hanging over them,'' said Matthew Maxwell, a London-based credit analyst at Calyon, the investment banking unit of Credit Agricole SA. Bond insurers ``are hurting, so now is a good time for Buffett to be getting into the market.''
Buffett, 77, said in an interview today on News Corp.'s Fox Business Network that it will be easier to break into the bond insurance market now than it would've been a couple of years ago because rivals are facing pressure on their ratings. He told the Wall Street Journal that Berkshire Hathaway Assurance Corp. will also seek permission to operate in California, Puerto Rico, Texas, Illinois and Florida. Jackie Wilson, a spokeswoman for Omaha, Nebraska-based Berkshire, confirmed Buffett's plans.
New York State Insurance Department granted the license today, spokesman David Neustadt said. Jerry Hagens, a spokesman for the Texas Department of Insurance, and Jason Kimbrough, a spokesman for California's regulator, said their states hadn't yet received applications from Berkshire. A call to Vern Iverson with the state of Florida wasn't returned.
MBIA, down 74 percent this year, closed down $3.53 to $18.74. Ambac, down 72 percent for the year, dropped $4.02 to $25.12. Buffett's decision also indicates he is unlikely to bail out any of the bond insurers.
``Warren Buffett's entry into the financial guaranty insurance business is a significant validation of the valuable role our industry plays in helping public entities issue debt,'' said Willard Hill, a spokesman for MBIA in Armonk, New York. ``We look forward to growing our company over the long term and competing with him and others in our industry for a long time to come.''
A telephone call to Peter Poillon, a spokesman for New York-based Ambac, wasn't returned.
Credit-default swaps on MBIA, which rise as perceptions of credit quality drop, rose 30 basis points to 610 basis points, the highest ever, according to CMA Datavision in London. Ambac increased 10 basis points to 620, the widest in three weeks.
Credit-default swaps, contracts conceived to protect bondholders against default, pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements.
The bond insurance venture is Buffett's third move in a week as he seeks investments to absorb $45 billion in cash. Buffett said Dec. 25 that he will pay $4.5 billion to gain control of Marmon Holdings Inc., the Pritzker family's closely held collection of 125 companies and Berkshire today agreed to buy a reinsurance unit of ING Groep NV for about 300 million euros ($440 million).
``Having new entrants in the market to provide municipalities with options to enhance the credit of new bonds or to potentially provide enhanced credit for outstanding downgraded bonds is a very positive development,'' New York insurance department Superintendent Eric Dinallo said in a statement today.
Berkshire Hathaway has AAA ratings from Fitch Ratings, Moody's Investors Service and Standard & Poor's and its guarantee would enable municipal bond issuers to cut the cost of financing everything from hospitals to schools to sports stadiums. Berkshire Hathaway is the largest investor in Moody's Corp., with a 19 percent stake as of Sept. 30.
``If Berkshire Hathaway Assurance knocks on the door of a municipal official, they all know who Warren Buffett is and they all know that the other major players in this business are suddenly suspect,'' said Frank Betz, who helps manage $800 million, including Berkshire shares, at Carret Zane Capital Management in Warren, New Jersey. ``It is such vintage Warren Buffett.''
MBIA, as well as Ambac and FGIC Corp. of New York, are trying to convince Moody's, Fitch and S&P that they deserve to keep their top ratings.
Fitch has given MBIA and Ambac less than six weeks to raise $1 billion each or face losing their AAA ratings. Moody's and S&P earlier month placed MBIA's ranking on negative outlook. MBIA on Dec. 10 said it will get $1 billion from private-equity firm Warburg Pincus LLC to bolster its capital and Ambac took out reinsurance on $29 billion of securities it guarantees.
``MBIA and Ambac are probably going to be able to get through this and raise the capital needed to retain their AAA ratings,'' said Rob Haines, an analyst at CreditSights Inc. in New York. ``But it hurts them.''
A bond insurer with a stable credit rating should find demand from municipalities, said Frank Hoadley, director of Capital Finance for the State of Wisconsin, and the chairman of the Government Finance Officers Association, an organization for executives in government-debt management.
``It seems to me that the debt insurance business has been hurt severely and it opens up some significant business opportunities,'' Hoadley said in a telephone interview.
Bonds sold by state governments make up about 33 percent of the insurance premiums collected by MBIA, the biggest of the monolines, and 50 percent of revenue for No. 2 competitor Ambac.
The companies stumbled as they expanded beyond municipal securities into structured finance such as collateralized debt obligations, which package pools of bonds and loans and slice them into separate pieces. The insurers guarantee about $1.2 trillion of structured finance debt.
Buffett, who has described derivatives as ``financial weapons of mass destruction,'' told the Journal he will focus on insuring municipal debt rather than CDOs.
``We're not going to stray off municipal bond insurance,'' Buffett said in the Fox interview. ``It's too hard to figure out those other things.''
``We would plan to charge more'' than existing bond insurers on the expectation that the strength of Berkshire's guarantee will merit the extra cost, he told Fox television.
Profit From Turmoil
Berkshire's Class A stock reached a record $151,650 a share on Dec. 11, having surged about 27 percent this year. The shares rose $3,300 to $141,100 today.
Buffett has profited in the past from turmoil in the insurance business. Berkshire's after-tax profit from insurance underwriting soared to $2.5 billion last year from $27 million in 2005 after providing insurance coverage for coastal properties vulnerable to storms as some premiums quadrupled because of record U.S. hurricane losses.
``If Buffett smells an opportunity, his track record suggests there is one,'' said Georg Grodzki, head of credit research at London-based Legal & General Group Plc. ``Buffett seems to believe the market is viable and the bond insurer has a future.''