Buffett's bond insurer may profit from rating cuts

Buffett's Berkshire Hathaway Inc. launched its own bond insurer late last year as credit problems began to mount for others, and those problems have only worsened since then.

Bond insurers essentially need "AAA" ratings to book new business.

"I think there is a presumption in the market that Buffett's municipal bond insurer is the only one that is 'AAA' by any standard," said Edward J. Grebeck, the chief executive of Tempus Advisors. "The rating agency downgrade will be good for Buffett's business."

Two other bond insurers, Financial Security Assurance Holdings Ltd. and Assured Guaranty Ltd., still carry "AAA" credit ratings and could also benefit. But Grebeck, whose firm consults with hedge funds and private equity firms on credit risk, said he questions the financial ratings on those companies.

"Assured and FSA both underprice the risk," Grebeck said. "They have the same problems as Ambac and MBIA."

Bond insurers originally offered insurance mainly to municipalities, but that changed in recent years, and most of the bond insurers started insuring structured finance products.

Those risky, complex assets, called collateralized debt obligations, include subprime mortgage debt given to customers with poor credit history. As those mortgages have increasingly defaulted, ratings agencies fear the bonds supported by the troubled loans will default as well.

Ambac and MBIA have now been downgraded by Moody's Investors Service, Standard & Poor's and Fitch Ratings. The rating agencies worry the insurers wouldn't be able to cover a potential spike in claims.

Moody's cut the insurance financial strength ratings for Ambac Assurance Corp. and Ambac Assurance UK Ltd. to "Aa3" from "AAA," and for MBIA Insurance Corp. to "A2" from "AAA."