Berkshire Hathaway Assurance Corp (BHAC)

BHAC is a Berkshire Hathaway subsidiary launched in late 2007 and rapidly scaled in 2008 to provide municipal bond insurance. It was created to exploit the market vacuum left by the collapse of "monoline" insurers like MBIA and Ambac during the Great Financial Crisis.

The Opportunity (2008)

For decades, municipal bond insurance was a "monotonous" business. Insurers (monolines) provided their AAA credit rating to cities and states for a fee. However, during the mid-2000s, these monolines began insuring CDOs and subprime mortgage pools. When those pools defaulted, the monolines' ratings collapsed, leaving municipalities without a credible insurance backstop.

The Launch

Under the leadership of Ajit Jain, Berkshire launched BHAC to provide "clean," well-capitalized insurance to the municipal market.

Capital Advantage: BHAC benefit from Berkshire's massive cash reserves and reputation for integrity.
Rapid Growth: In 2008, BHAC wrote $16.3 billion of premium, including $13.9 billion related to its agreement with Swiss Re to provide cover for local government bonds.

The Strategy

Buffett noted in the 2008 Letter that BHAC's edge was simplicity. While competitors had "clobbered up" their balance sheets with "madness squared" (CDOs), BHAC only insured risks that Berkshire understood and could price with a significant margin of safety.

Quotes

"Our entry into the municipal bond insurance business... was a classic example of Berkshire utilizing its capital strength when competitors were retreating in disarray." — 2008 Letter

References: 2008 Letter, 2008 Meeting, Ajit Jain, Bond Insurance, Great Financial Crisis
Index: index

📚 Historical Mentions & Citations (1)

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2008 LetterExcerpt Available

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Early in 2008, we activated Berkshire Hathaway Assurance Company (“BHAC”) as an insurer of the tax-exempt bonds issued by states, cities and other local entities. BHAC insures these securities for issuers both at the time their bonds are sold to the public (primary transactions) and later, when the bonds are already owned by investors (secondary transactions). We have a great many more multiples of capital behind the insurance we write than does any other monoline. Consequently, our guarantee is far more valuable than theirs. This explains why many sophisticated investors have bought second-to-pay insurance from us even though they were already insured by another monoline. BHAC has become not only the insurer of preference, but in many cases the sole insurer acceptable to bondholders.

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