By Andrew Frye
Sept. 9 (Bloomberg) -- Warren Buffett’s Berkshire Hathaway Inc. is adding sales of insurance coverage on foreclosed homes and properties occupied by distressed borrowers to make money from banks burned by the mortgage-market collapse.
Berkshire follows Munich Re, the world’s biggest reinsurer, and Australia’s QBE Insurance Group Ltd. in targeting one of the few expanding U.S. insurance markets. The policies are riskier than typical home coverage because the properties are more prone to neglect or vandalism.
“It’s part of the standard practice of Berkshire, which is to respond opportunistically,” said Tom Russo, a partner at Gardner Russo & Gardner, which holds Berkshire shares. “They have appetite to act, the capital to act and the credibility.”
Buffett, who’s sitting on a $24.5 billion cash pile at Berkshire, scaled back coverage of the largest commercial properties against hurricanes and other catastrophes as the recession curbed demand and competitors cut prices. With the venture, Omaha, Nebraska-based Berkshire is positioning itself to benefit from a supply of foreclosed homes that quadrupled in three years.
“This is one of those niche areas that is growing,” said Robert Hartwig, president of the New York-based Insurance Information Institute. “The homeowners market overall is not growing much.”
Buffett, who sidestepped the worst of the subprime slump, has boosted holdings in companies hurt by the recession and expanded in markets where demand is increasing. In 2007, he started Berkshire Hathaway Assurance Corp. to guarantee municipal bonds as MBIA Inc. and Ambac Financial Group Inc. faltered.
‘Changing Market Conditions’
Berkshire’s expansion this year includes so-called forced- placed coverage, in which lenders require borrowers to buy new insurance after original policies lapse. In lender-owned policies, banks protect homes or unfinished developments they seized in foreclosure.
The business is “part of our efforts to adapt to changing market conditions,” Berkshire Hathaway Homestate Cos. said in a statement on its Web site in April. The company said it plans to cover both residential and commercial properties, and won’t underwrite coastal areas or most mobile homes.
“He’s in for the quick pop and I’ll bet he sees that here,” said Paul Howard, an analyst with Janney Montgomery Scott LLC’s Langen McAlenney division in Hartford, Connecticut. “This is kind of how he was stepping up to financial guarantee at the crisis time last year.”
Berkshire insured $3.3 billion of new long-term municipal issues in 2008, taking almost 5 percent of the insured market in its first year of business, based on data compiled by Thomson Reuters. In the first quarter of 2009, Berkshire’s share of insured municipal new issues shrank to 3 percent on $354 million of deals, the data show. Buffett said in a press conference in May that he scaled back the business this year because rates weren’t adequate.
The two-year drop in home prices eroded the value of collateral banks count on to recoup losses when mortgage- holders default. That investment can be further depleted by fire, tornadoes and what Homestate calls “malicious mischief” if their customers stop paying for homeowners insurance.
Lenders contract with specialized carriers including Assurant Inc. and Bank of America Corp.’s Balboa Insurance Group to make sure borrowers are current on their insurance and issue temporary policies when coverage is dropped. In some cases, a broker like Seattle Specialty Insurance Services Inc. monitors a bank’s portfolio and arranges emergency coverage.
Assurant monitors insurance on about 29 million loans, or more than 60 percent of the market, said Jim Sykes, a spokesman for the New York-based company. Assurant’s sales of homeowner coverage, mostly involving forced-placed coverage, increased about 24 percent last year, he said. Premium revenue from creditor-placed coverage is more than $1 billion a year, he said. Sykes declined to comment on Berkshire.
Berkshire often makes a quarter to half its profit on insurance operations that include car coverage specialist Geico Corp. and reinsurer General Re Corp. Buffett uses the “float,” or accumulated premium, that his insurance businesses generate to invest before paying claims. Buffett didn’t reply to an e-mail request for comment sent to his assistant, Carrie Kizer.
Bank of America
Berkshire’s approach to forced-placed coverage contrasts with QBE, Munich Re and Bank of America, which bought established businesses. The company may have difficulty winning clients, market participants said.
“It becomes an issue of substitution: What are they going to bring that no one else has?” said Rick Pedack, president of Seattle Specialty. Are they “going to be cheaper than anyone else, or are they going to pay more commission?”
QBE, Australia’s biggest property-casualty carrier, spent $575 million in December buying ZC Sterling Corp. to gain access to about 12 percent of the forced-placed market in the U.S., according to the company. Munich Re, named for the German city where it’s based, acquired American Modern Insurance Group in its $1.3 billion purchase of Midland Co. in April 2008. Bank of America inherited Balboa last year in its $2.5 billion takeover of subprime lender Countrywide Financial Corp.
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