Future Gloomy for Ambac, MBIA - Berkshire Likely to Emerge as New Bond Insurance Leader

Extremely high exposure to troubled assets, coupled with losses from collateralized debt obligations, residential and other types of structured products have crippled bond insurers like Ambac (ABK) and MBIA (MBI). Venturing of traditional bond insurers into the structured finance market has triggered massive mark to market losses.

Ambac’s shareholders’ equity has continued to deteriorate. Residential Mortgage Backed Securities (RMBS) portfolios, especially Alt-A exposures, and reduced capitalization pose serious challenges to the company’s business. Deteriorating market share and a turbulent financial market only magnifies the threat. Though the company’s claims-paying resources amounted to about $12 billion as of March 31, 2009, we believe barring a significant rebound in the subprime mortgage market, Ambac could easily become insolvent over time.

MBI has also been reporting negative results since 2H07. The bond insurer is facing continued deterioration in its insured portfolio of structured credits with stress reaching sectors beyond residential mortgage-related securities.

Presently both the bond insurers are in run-off mode, where an insurer stops writing new business but continues to pay out on existing liabilities.

Municipal bond insurance business may provide relief to these ailing bond insurers. In view of potential demand for muni bond insurance business, ABK as well as MBI have launched separate units -- National Public Finance Guaranty Corp. and Everspan, respectively, have been repositioned to write new business.

Entry of newcomer Berkshire Hathaway (BRK.A) Assurance Corp. in the municipal bond insurance market means more competition for ABK and MBI. We believe that as both the two biggest bond insurers have been stripped off their AAA credit status, it will not be long before Berkshire captures their market share to emerge as a leading bond insurer.

Comments

[robert99:]

Interesting, I had not considered this angle on BRK. Makes sense though - thanks.

Jul 16 01:59 PM

[corellian98:]

This goes against two things insurance analyst Rob Haines said recently in a Webcast presentation.

#1 - "While some insurers, such as MBIA (MBI.N) and Ambac (ABK.N), are stronger than others, "we think the traditional market leaders' franchises have been permanently impaired".

And....

#2 - "Another relative newcomer to muni insurance, Berkshire Hathaway Assurance Corp, "will not be a long-term competitor in this market," Haines said. The new insurer is a unit of Berkshire Hathaway Inc."

Please fully disclose your stock postions in the companies mentioned, and who, if someone other then yourself commisioned this view. Failing to fully disclose these items will discredit your posts going forward. Thank you.

Jul 16 02:32 PM

[apppro:]

Missing the point here people! When Ambac & MBIA BOTH had to deal with Bill Ackman in late 2007, Buffett was asked to help out and his answer was to let the 2 companies get shorted to death. He immediately then opened his own muni business, but still refused to do anyhting constructive. Only till now when States like NY and CA are in dire straits do people like you come out and say something - albeit VERY wrong, but at least something.

WHAT A JOKE!!! Only thing - IT'S NOT FRIGGEN' FUNNY!!

Jul 16 02:51 PM

[mkreisel:]

Buffett is no longer that enthusiastic about muni bond insurance: governments would rather let bond insurers eat the crap than to raise taxes.

Jul 16 10:12 PM

[PlentyOStocks:]

Buffet was/is charging obscenely high premiums; taking advantage of the crisis. Once premiums go back to normal he will be gone.

You like most people misuse the term insolvent. A homeowner underwater with his mortgage is insolvent; but if he can afford the mortgage payments it really does not matter. Same for Ambac and MBIA. If they can pay their bills, they'll likely be around unless the government panics and takes them over.

Jul 17 12:47 AM

[Dave Shafer:]

" Same for Ambac and MBIA. If they can pay their bills, they'll likely be around unless the government panics and takes them over. "

Two issues here. First, if they can't sell enough insurance bringing in premiums they will eat through reserves rapidly with this amount of alt-a exposure. Second, and perhaps more importantly is if the market looses confidence in them being able to pay off on the insurance they its lights out.

Berkshire has a habit of properly pricing risk and not getting involved if the premiums are mismatched with risk. Note there reduction over the last three years in CAT insurance.

Jul 17 08:29 AM

[oldlures1:]

Anybody know if BRK is still the largest shareholder of Moody's, the company that started the downgrade run on ABK and MBI? It screams conflict-of-interest, but I've heard little chatter on this matter since this time last year.

Jul 20 03:51 PM

[U338129:]

How exactly does it "scream conflict-of-interest?" If you remember, Moody's dropped BRK's AAA rating and it's not like they're doing anything to help BRK's stock.

Moody's doesn't care who they downgrade and BRK has zero impact on their ratings. Buffett and Munger even mentioned at the shareholder meeting that they aren't the types to confront Moody's over such issues either; they're passive investors.

So, that's why you've heard little chatter on this because it's a complete non-issue.


On Jul 20 03:51 PM oldlures1 wrote:

> Anybody know if BRK is still the largest shareholder of Moody's,
> the company that started the downgrade run on ABK and MBI? It screams
> conflict-of-interest, but I've heard little chatter on this matter
> since this time last year.

Jul 20 05:13 PM

[oldlures1:]

U338129 - Good point, but for arugment's sake, I'd offer that Moody's downgrade of BRK is irrelevant. As an aside, they only dropped BRK's rating after catching flack about the conflict of interest, so perhaps they're just attempting to save face.
Ultimately, you're probably right, there's no conflict of interest, but sometimes there only need be the perception of such.

Jul 30 08:40 AM

[oldlures1:]

On a different front, in light of Ambac's recent downgrade to CC and talks of possible regulatory intervention, I wonder what the possibility is that National could reinsure ABK's muni portfolio, like they did with FGIC? That'd be sweet!
I'm long MBI.

Jul 30 08:42 AM