State hedges against disaster $220 million is paid to hurricane fund

Jul 3, 2008

Herald-Tribune--July 3, 2008


TALLAHASSEE — – The state placed a $220 million bet Wednesday as a hedge against catastrophic hurricane damage this year, but decided at the last minute to protect Floridians from higher insurance premiums to pay for the plan.

The trustees of the State Board of Administration — Gov. Charlie Crist, Attorney General Bill McCollum and Chief Financial Officer Alex Sink — approved the plan unanimously.

But McCollum and Sink criticized the idea, saying it was a last-minute move made in a panic that amounts to a virtual giveaway to billionaire Warren Buffett, chairman of Berkshire Hathaway.

"I think it’s not a good deal," said McCollum, a Republican. "It’s very likely we’ll never get the benefit of it, and Berkshire Hathaway will wind up pocketing the money."

Added Sink: "Warren Buffett did not get to be a multibillionaire by not doing good deals for himself. This is not a good choice."

But all three SBA trustees said that with the hurricane season already a month old, the state had no other option for obtaining emergency funding in case of major storm damage.

In order to attract insurers, the state-run Florida Hurricane Catastrophe Fund was formed after 1992’s Hurricane Andrew to reimburse insurers for major claims paid to residents.

The so-called Cat Fund has $8 billion in reserves collected from assessments on insurance policies in the state. But after Crist led the charge last year to deepen the state’s risk in order to lower insurance premiums, the fund is on the hook for up to $29 billion in reimbursements to insurers this year in case of catastrophic storm damage.

While the fund’s administrators felt confident that they could use reserves, bonds and other resources to pay for most potential losses, they could not guarantee a reliable source for approximately $4 billion the state would have to pay in a worst-case scenario.

The result was a plan to pay Berkshire Hathaway $220 million in order to secure a promise of $4 billion in quick cash. If the hurricane season is light and the state does not need the $4 billion to reimburse insurers for Florida property claims, then the Cat Fund would only pay the $220 million.

If some or all of the $4 billion is needed, then all Floridians would pay an unknown increase in insurance assessments in the future to pay back the bond.

For a while Wednesday, it appeared that Floridians would have to pay an approximate 2 percent increase in property insurance premiums to offset the $220 million bet.

SBA interim director Bob Milligan originally said state law requires the Cat Fund to assess all insurance customers to make up the expenditure. McCollum and Sink agreed; Crist did not.

In a statement late Wednesday afternoon, Milligan said the $220 million would come from existing funds and not be passed on to insurance customers.

Still, the money will come from the pool set aside to pay insurers. That means potential premium increases down the road if the fund is depleted. McCollum criticized the growing reliance on the state’s Cat Fund as an unfair burden on Floridians who live in the interior of the state but must pay more in assessments to offset the risk of coastal residents.

"It’s not a happy situation," he said. "They are going to be subsidizing the people who are at greater risk."

He said there was only a 3percent or 4 percent chance that the state would need the extra protection, and said the federal government would probably provide low-interest loans to help the state pay insurers’ claims.