State turning to Warren Buffett for hurricane fund bailout

Jul 3, 2008

News-Journal–July 03, 2008

Tallahassee bureau chief

TALLAHASSEE — Worried about financial problems if major hurricanes slam Florida, state leaders are turning to billionaire Warren Buffett for backup.

Gov. Charlie Crist and two Cabinet members moved forward Wednesday with a plan to pay about $224 million to the Buffett-led firm Berkshire Hathaway to help protect the state against catastrophic storm damages.

In exchange for the money, Berkshire Hathaway would agree to buy $4 billion in state bonds if a mega-hurricane — or multiple big hurricanes — hit the state.

The deal would partly shore up the Florida Hurricane Catastrophe Fund, a state program that sells low-cost reinsurance to property-insurance companies. Reinsurance is a type of coverage that insurers buy to help pay claims after hurricanes.

With the nation’s financial markets in disarray, state officials have grown increasingly concerned the catastrophe fund would not be able to borrow enough money to meet its obligations after a Hurricane Andrew-type storm.

Attorney General Bill McCollum and state Chief Financial Officer Alex Sink agreed with Crist to pursue the deal. But both said they didn’t like having to pay Berkshire Hathaway to line up financing that might never be tapped.

"We’ve got both hands tied behind our back, and we don’t have a lot of options here," said Sink, who along with Crist and McCollum make up the state Board of Administration that oversees the catastrophe fund.

Bob Milligan, interim executive director of the Board of Administration, said the catastrophe fund will take money out of reserves to pay Berkshire Hathaway. The arrangement will not lead to rate increases for insurance policyholders.

The catastrophe fund plays a critical role in Florida’s property-insurance system, which was rocked by eight hurricanes in 2004 and 2005.

With Crist’s backing, lawmakers last year dramatically increased the amount of coverage provided by the fund, raising it from $16 billion to what is now about $29 billion.

In return for making more cheap reinsurance available to property insurers, lawmakers required that the companies reduce rates for consumers.

Lawmakers always expected the fund would have to borrow money — which would be paid back by policyholders throughout the state — if a major hurricane hit.

But state and insurance-industry officials began raising concerns this year about the state’s ability to borrow enough money to meet the fund’s obligations, amid widespread problems in the nation’s credit markets.

Under the deal that emerged Wednesday, Berkshire Hathaway would guarantee it would buy $4 billion in bonds to cover hurricane losses that top $25 billion.

While Berkshire Hathaway would get $224 million upfront for giving that assurance, it also would ultimately collect interest on any bonds it buys. People throughout Florida would have to pay extra charges on their insurance policies to finance the bonds.

McCollum said that could mean people living in interior parts of the state would subsidize people in more hurricane-prone areas.

"I think the situation we’re in today for the people in Florida is not good at all," he said.

John Forney, a financial adviser to the catastrophe fund, said the state is trying to buy "certainty" that it will be able to borrow money if necessary.

But with hurricane season already a month old, Sink described the decision as being made in a panic.

"We waited until the last minute," said Sink, who unsuccessfully sought to reduce the size of the catastrophe fund during this year’s legislative session. "We’re not thinking ahead."

Crist, however, disagreed with Sink’s description.

"I’m not panicked," he said. "But I am concerned."

What it Means:

Gov. Charlie Crist and two Cabinet members approved a plan Wednesday to try to bolster the Florida Hurricane Catastrophe Fund. Here are key points:

· The state would pay about $224 million to Berkshire Hathaway, a firm led by billionaire investor Warren Buffett.

· In exchange, Berkshire Hathaway would agree to buy $4 billion in bonds if a catastrophic hurricane — or multiple big hurricanes — hit Florida.

· The $4 billion would help the Florida Hurricane Catastrophe Fund pay reinsurance claims.

· Insurance policyholders ultimately would have to pay interest on any bonds purchased by Berkshire Hathaway.

SOURCES: State Board of Administration, staff reports