Florida Votes to Approve $224 Million Deal With Berkshire Hathaway to Boost Cat Fund

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July 30, 2008 Wednesday 02:12 PM EST

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Florida Votes to Approve $224 Million Deal With Berkshire Hathaway to Boost Cat Fund

Chad Hemenway

TALLAHASSEE, Fla.

Florida officials have cleared the way with a second vote for the Sunshine State to pay Warren Buffett's Berkshire Hathaway $224 million now in return for the company's promise to buy $4 billion in state bonds should a hurricane cause major damage this year.

Of the state Cabinet members, Gov. Charlie Crist and Chief Financial Officer Alex Sink voted to approve the deal. Attorney General Bill McCollum voted against it. A previous vote among the members on July 2 was unanimous to give the State Board of Administration, which oversees the Florida Hurricane Catastrophe Fund, authorization to draft a contract.

The cat fund will pay Berkshire, which will buy the tax-exempt bonds if insured losses from hurricanes this year eclipse $25 billion. The cat fund will take the funds to pay Berkshire from about $6.3 billion it has in reserves. The 30-year bonds come with 6.5% interest.

Cat fund officials have said it can cover about $29 billion in potential liability. Before bonding, the fund is prepared to cover about $15 billion of insured losses. With the promise from Berkshire to buy $4 billion in bonds if the insured losses threshold is met, the fund is now prepared for a 1-in-44 year event (BestWire, July 3, 2008).

An A.M. Best special report issue in May alluded to the possibility that the cat fund would examine other products and financial options in light of a troubled bond market. A put option product, like this one, was a solution the report considered.

SBA spokesman Dennis MacKee said the terms of the contract have been agreed to but nothing has been executed. There was some concern at the Cabinet meeting that the first draft of the contract contained "escape clauses" for Berkshire but MacKee said the wording that bothered the state "was essentially removed."

In the negotiating process, MacKee said Bob Milligan, director of the SBA, wanted "to make sure the contract was one that no one can get out of," especially because the state is putting almost a quarter-billion dollars up front from the cat fund reserves.

Hurricane season began June 1. Colorado State University's hurricane forecasting team upped its predictions for the 2008 Atlantic storm season, and now anticipates 15 named storms, eight hurricanes and four intense hurricanes. According to CSU, the odds of a major hurricane making landfall in the United States in 2008 is 69%, compared with a 52% average over the past century (BestWire, April 9, 2008).

Hurricane Dolly made landfall on the Texas coast as a Category 2 storm on July 23. AIR Worldwide is projecting U.S. losses at $350 million to $700 million (BestWire, July 25, 2008). In Mexico, AIR is forecasting losses between $50 million and $100 million.

(By Chad Hemenway, associate editor, BestWeek: [email protected])

July 31, 2008