Wednesday, December 31, 2008

Buffett Wins $224 Million Storm Bet With Florida

We have an abiding fascination with risk analysis, hurricanes and Warren. Bloomberg puts them all in one story:
Billionaire Warren Buffett’s Berkshire Hathaway Inc. won a $224 million bet that Florida would escape major damage from hurricanes this year.

Florida’s option agreement that would have compelled Buffett to buy $4 billion of bonds to finance storm recovery will expire Dec. 31, Dennis MacKee, a spokesman for the State Board of Administration, said in an interview today. The state earlier paid Buffett $224 million in return for his commitment to buy the debt if needed. The calm season meant Florida had no need to raise the money.

Florida turned to Omaha, Nebraska-based Berkshire to erase doubts about the state’s ability to raise money after a hurricane. The state sells coverage to homeowners and private companies at below-market rates, and plans to fund cash shortfalls in the bond market. Finding investors could be a “very challenging task,” Fitch Ratings said in March.

“It would’ve been difficult to issue bonds in this environment, so I do think it ended up working out well for everyone involved,” MacKee said. “We were fortunate to have a mild hurricane season.”

Under the terms of the deal disclosed in July, Berkshire agreed to buy the debt if the state’s fund incurred $25 billion in losses by yearend. Berkshire would have collected 6.5 percent annual interest over the 30-year life of the bond....MORE