Thursday, July 31, 2008

Oracle of Omaha Insures All of Florida

"It's Buffett the symbol that matters now, Buffett the folk hero, Buffett the communicator. * * * [T]he charismatic, reassuring, quotable prototype of the honest capitalist."
Walter Kirn, "American Everyman," Atlantic Monthly, November, 2004
Paige St. John, the ace reporter formerly with Gannett Co., is reporting in the Sarasota Herald Tribune today that Omaha financial sage Warren Buffett, one of the richest men in the world, has agreed to insure the State of Florida against the hazard of a 2008 hurricane. The deal works like this:
[T]he state will pay $224 million to Buffett's company, Berkshire Hathaway, in exchange for the promise to lend the state $4 billion if Florida is struck by a major hurricane this year. If the state does not need to borrow the money, then Buffett pockets the $224 million.

If a major storm hits the state, Buffett keeps the $224 million and then lends Florida $4 billion at a 6.5 percent interest rate.
Berkshire Hathaway is the parent company of multiple insurance and reinsurance divisions and companies, including National Indemnity, Berkshire Hathaway Homestate Companies, United States Liability Insurance Group, and General Re, perhaps the world's largest holding company of an entire collection of other insurance and reinsurance companies.

Readers likely are most familiar with another Berkshire-Hathaway subsidiary, Geico, the auto insurance subsidiary famously symbolized by a gecko and a caveman.

Predictably, for a state that has had trouble paying off its past hurricane debts -- not to mention getting suckered by ex-governor Jeb Bush into buying worthless derivative mortgage investments that dug us into deeper debt -- the deal is drawing mixed reviews. But not entirely along partisan lines, as St. John's sources reveal.

Republican Attorney General Bill McCollum calls it "a bad deal." Republican Governor Charlie Crist and Democratic state CEO Alex Sink say it's "necessary." Florida state representative Dan Gelber, the Democrats' minority leader, "supports the Buffett deal as a way to spread the risk and prepare the state for a worst-case scenario."

Gelber, a Miami attorney, had this to say to reporter St. John:
"The problem that Florida has right now is that we have a windstorm insurance policy that really only works if there are no windstorms.
* * *
Everybody is gambling; we are gambling that we don't have a major storm," he said. "Mr. Buffett is gambling that he can make money off us by not having a major storm."
Sounds to us just like the average home owners' insurance dilemma across the state. The major difference is, Warren Buffett has shown over many years that he can be trusted. Unlike, we should add, many of the property insurance companies who've had their bad hands around our collective necks.

1 comment:

Anonymous said...

Oh my God! Does anyone in Florida care about this? What a mess!

I'm not as concerned about Buffet's profit as I am about how we ended up with both a Cat Fund and a State insurance Company - Citizens Insurance Florida that just don't collect enough money to pay their claims.

Here is another great article about the mess that Citizens Insurance Florida now finds itself in:

Thanks for making us aware of this!