Friday, July 4, 2008

Buffett's Berkshire Paid to Buy Bonds If Storm Hits

(Bloomberg) -- Billionaire investor Warren Buffett's Berkshire Hathaway Inc. will collect $224 million from Florida in exchange for an assurance that he'll provide capital to the state if a major hurricane strikes this year.

Berkshire agreed to buy $4 billion in tax-free state bonds should the state's catastrophe program need to raise money after a major storm, said Dennis MacKee, a spokesman for the State Board of Administration, in an interview today.

The deal may erase some of the uncertainty about Florida'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. Raising money could be a ``very challenging task,'' Fitch Ratings said in March.

``Given the state of the financial markets today, this addresses a possible need we have to place a pretty substantial bond issue,'' MacKee said. ``We were looking for a liquidity product that would allow us to move quickly after a major storm.''

Fitch said the state's homeowners insurance market could ``effectively collapse'' if a major storm hits. About 25 percent of U.S. coastal property in hurricane-prone areas is in Florida, Fitch said.

Berkshire will have to purchase the debt if the state's fund incurs $25 billion in losses this year, MacKee said. The state predicts a single storm can cause losses of that magnitude once every 32 years, he said. The most-expensive disaster in U.S. history, Hurricane Katrina in 2005, cost the industry $41.1 billion.

6.5 Percent Interest
Omaha, Nebraska-based Berkshire would collect 6.5 percent annual interest over the 30-year life of the bond, MacKee said. Florida would charge assessments to policyholders in the state to repay the debt.

The Miami Herald reported the transaction earlier today.
Buffett has said Berkshire is prepared to lose as much as $6 billion on a single catastrophe if the company is paid for the risk. Berkshire typically gets about half its profit from insurance. Company spokeswoman Jackie Wilson didn't immediately return a call seeking comment.

Berkshire's stock declined about 15 percent in the first half of the year, the worst performance in the period since 1990. After reporting record 2007 earnings of $13.2 billion, the 77- year-old Buffett told shareholders in February that profit margins from insurance will drop this year as prices decline industrywide and claims costs rise.

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