Dinallo Outlines His Approach that Coaxed Berkshire Hathaway into Bond Market

NEW YORK, Jul 14, 2008 (A. M. Best via COMTEX) -- BRK/A | Quote | Chart | News | PowerRating -- New York Insurance Commissioner Eric Dinallo told an audience at the National Conference of Insurance Legislators on July 12 that he assumed Berkshire Hathaway wasn't returning his calls because "they thought I was calling with a consumer complaint."

But Dinallo was "dialing for dollars," he said. The commissioner was calling the Warren Buffett-owned company as part of his plan to stabilize the troubled bond insurance sector in the state ? a plan he attempted to outline for legislators at a recent NCOIL general session in New York.

When Dinallo finally got a hold of Berkshire, he said he wondered if they'd like to step into the bond market. "I assume you have the capital," Dinallo joked as he paraphrased his conversation. "We can get you a license."

Berkshire Hathaway recently did enter the market, providing new capital when it launched New York-licensed Berkshire Hathaway Assurance Corp. -? with $105 million in bond insurance capital. Berkshire Hathaway Assurance Corp. is backed with the top credit rating of Berkshire subsidiary National Indemnity Group, and is now licensed to operate in 45 U.S. jurisdictions (BestWire, March 31, 2008).

Dinallo credited the National Association of Insurance Commissioners' Uniform Certificate of Authority Application with the rapid approval of Buffett's licenses.

"I knew we had to get someone who had a name and the trust," Dinallo said of turning to the well-known billionaire. "I knew they had the money. Buffett is a market-maker. If he goes, others will go."

Dinallo mentioned WL Ross & Co. LLC Chairman Wilbur Ross. Ross purchased $250 million of Assured Guaranty Ltd. common shares and committed to purchase up to $750 million additional shares at the company?s option (BestWire, March 3, 2008).

Though he admitted making calls to companies like Berkshire "wasn't great for New York domestics," Dinallo said he believed the market "desperately needed capacity" because of write-downs and downgrading. The sector took nearly $5 billion in first-quarter net losses due to underwriting of mortgage-backed securities, collateralized debt obligations and securitized bundles of home equity lines of credit.

Dinallo said he thought the market needed between $10 billion and $15 billion in capital. Thus far, $7 billion has been injected into the market, he reported.

Several of the financial guaranty sector's major writers have been stung by mark-to-market credit default swaps sold to insure collateralized debt obligations and other asset-backed structured products tied to the housing market. The write-downs have led some credit rating agencies to downgrade the financial strength of a number of major bond insurers, and prompted regulators and lawmakers to recommend various forms of intervention in an attempt to keep downgrades from adversely impacting the $1.6 trillion municipal bond market. Of particular concern had been whether the downgrades could spark forced selling by money market mutual funds and other institutional entities that are required to hold only the most highly rated investments (BestWire, March 31, 2008).

Because New York is the "default setting" for statutes throughout the country, eyes are on the state and its "new rules for the road," Dinallo said. Dinallo has proposed legislation doubling the minimum capital requirements from $65 million to $125 million for monoline bond insurers, who he said "robotically" wrote the insurance for those who had a triple-A rating but were "very, very far away from AAA."

The measure did not get a hearing before New York lawmakers adjourned for the year.

As chairman of the NAIC's Valuation of Securities Task Force, Dinallo recently announced a plan to permit insurers to submit securities affected by bond insurer downgrades for re-rating by its own Securities Valuation Office (BestWire, June 2, 2008).

"So this can't happen again, we are actively writing new regulations and statutes," Dinallo said.

(By Chad Hemenway, associate editor, BestWeek: Chad.Hemenway@ambest.com)

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