The state of Florida has reluctantly agreed to pay Warren Buffett's Berkshire Hathaway $224 million now, in exchange for a promise it will be able to borrow $4 billion from Berkshire later, if the state gets severely slammed by hurricanes this year.
The deal is, essentially, insurance on insurance, one of Buffett's specialties.
Florida has a reinsurance operation called the Hurricane Catastrophe Fund, created after 1993's Hurricane Andrew, that provides "reimbursements to insurers for a portion of their catastrophic hurricane losses."
The goal: if insurance companies know they won't have to bear the full cost of unusually heavy hurricane damages, they can charge their customers lower premiums than they would if they had to be prepared for the worst.
The fund has $8 billion in cash right now, but officials are worried that weakness in the credit markets could make it hard for the state to borrow enough money to cover losses from an especially bad hurricane season.
That's where Buffett comes in. In exchange for a payment of $224 million now, Berkshire promises to loan Florida $4 billion dollars later. It would make the loan by purchasing 30-year tax-free bonds with a 6.5 percent coupon from the state.
But Berkshire only has to follow through if the Florida fund needs to cover more than $25 billion in losses this year.
If it's a relatively quiet storm season, like the last few years, Berkshire pockets the $224 million. If not, it's out $4 billion up front, but gets paid back over three decades.
The Miami Herald reports that Florida officials aren't especially happy with the deal but feel they have no choice because no one else is willing to guarantee the liquidity they might need.
Attorney General Bill McCollum: "This is not a good thing in my opinion, but I'm supporting it because it is the only responsible choice at the moment."
Chief Financial Officer Alex Sink: "We are being held hostage by only one product ... Warren Buffett did not become a multibillionaire by not doing good deals for himself. We've got both hands tied behind our back."
Sailboat269's comment on the Herald's website: "If you don't like the deal, don't agree to it!"
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