Warren Buffett has emerged as a possible buyer of the insurance arm of Royal Bank of Scotland (RBS).

Speaking at the annual meeting of his Berkshire Hathaway investment group yesterday, Mr Buffett said that his business was “close” to buying a medium-sized British company and would look at the possible sale of RBS’s insurance unit.

Last month RBS said that it was considering selling all or part of RBS Insurance, Britain’s second-largest general insurer, which includes the Direct Line and Churchill brands, to bolster its balance sheet. Analysts have valued it at up to £8 billion.

Mr Buffett, who was responding to reports that he may be interested in Direct Line, also told journalists that he believed that the US economy was now in recession. He said: “I would define that as a situation where people are doing less well than they were three months, six months or eight months earlier and most businesses find themselves in that position too.”

Separately, Mr Buffett’s new bond insurer emerged as the biggest underwriter of American local government securities in its first full quarter of operation, taking in $400 million of premiums relating to an estimated $20 billion of municipal bonds.

Mr Buffett claimed that the volume of new bond insurance policies underwritten by his dedicated municipal securities business in the first quarter of this year was not only the largest in the United States, but could be even larger than all its rivals combined.

Mr Buffett set up Berkshire Hathaway Assurance in December, at the prompting of New York insurance regulators.

Last week Richard Blumenthal, Connecticut’s attorney-general, said that he was examining a “clear and direct conflict of interest” between the new bond insurer and Mr Buffett’s long-held stake of nearly 20 per cent in Moody’s ratings agency as part of a broader study of the ratings industry.

Before the shareholders’ meeting, Mr Buffett commented on the case for the first time, denying that there was any conflict. He said: “It would be wrong if we tried to pressure Moody’s, but that never happened. I have no contact with the management of Moody’s.”

If Berkshire Hathaway, a company with about $40 billion of cash and holdings in household names such as Coca-Cola and Tesco, were not rated AAA, Mr Buffett said, he was not sure which company would be.

Many bond insurers were hit hard by the surge in claims relating to the mortgage securities that they had underwritten.

Regulators were worried that the ability of local government to raise money for public projects, such as roads and bridges, would be severely hampered if existing insurers could no longer guarantee new municipal bonds.

Mr Buffett said that Berkshire Hathaway’s 30-person insurance operation had underwritten 278 securities, including about $750 million of bonds to finance two water projects in Detroit. He said that many of these bonds had been insured by existing AAA-rated underwriters but that their owners were concerned about their ability to meet potential claims in the wake of the sub-prime mortgage meltdown.

Berkshire Hathaway was charging an average of “two and a fraction of a per cent” to underwrite these bonds, against the 1 per cent typically charged by its competitors, Mr Buffett said. The $400 million of premiums received thus indicate $20 billion of bonds.

“It tells you something about the state of AAA when they are paying us to write business that is already insured,” Mr Buffett said.

His municipal bond insurer further illustrates how Mr Buffett is using his cash to his benefit as credit markets dry up. Last week, he agreed to take a 19 per cent stake in Wrigley’s for $2.1 billion as part of Mars’s $23 billion takeover of the chewing gum group. His stake comes at half the price Mars paid Wrigley’s shareholders because he stumped up $4.4 billion that was crucial to financing the transaction.

On Friday, Berkshire Hathaway unveiled first-quarter profits down 64 per cent to $940 million after recording a $1.6 billion loss on derivatives contracts under accounting rules. Mr Buffett said he was confident of profiting from these contracts in the long term.