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Florida's storm wager: $224-million

By Jennifer Liberto, Times Staff Writer
In print: Thursday, July 3, 2008

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TALLAHASSEE — To keep insurance rates lower, Florida's elected officials last year voted to shift much of the state's hurricane risk to the government.

Now some are having buyer's remorse — at a cost of nearly a quarter-billion dollars.

It's a deal that Chief Financial Officer Alex Sink called a "stinky pig" Wednesday even as she voted for it with Gov. Charlie Crist and Attorney General Bill McCollum.

The trio, meeting as the State Board of Administration, agreed to pay $224-million to Warren Buffett's Berkshire Hathaway company.

In exchange, the company agrees for one year to provide up to $4-billion in bonds if the Florida Hurricane Catastrophe Fund faces claims of more than $25-billion this hurricane season.

The contract won't lower the government's financial risk should such a storm season hit. The Cat Fund will still be on the hook for paying back the bonds — most likely by assessing Florida insurance policyholders, as it's done for the 2005 hurricanes.

But it would provide near-immediate cash flow, something state leaders worried would be hard to obtain.

Claims of $25-billion to the Cat Fund would greatly eclipse the total property damage from Florida's 2004 hurricanes, $16-billion, and 2005, $11-billion. Advisers said the odds the money would be needed was only 3 percent. But all three agreed to the contract to ensure access to cash.

But not before Sink and McCollum let it be known, in the most public and direct way ever, that they weren't happy about Florida's level of risk and the governor's support for it.

In January 2007, the Legislature expanded the Cat Fund's ability to provide reimbursements to insurers after major hurricanes. In exchange, insurers pay a premium, a cost that is passed onto policyholders. But the Cat Fund charges much less for "reinsurance" than the private market, thereby reducing the costs passed onto consumers.

The fund's expansion reduced pressure on insurance rates but increased the odds policyholders statewide would be assessed to cover damages after a storm.

"I'm not going to sit here next July 1st and be held hostage by one provider, because that's what happened," Sink said. Berkshire submitted the only bid for the contract, called a "put option."

"Warren Buffett did not become a multibillionaire by not doing good deals for himself. We've got both hands tied behind our back," she said.

McCollum, attending by phone, chimed in, "I think this is a very bad deal in that we're putting out $224-million and it's highly unlikely will ever get any real benefit from it. I'm concerned with this entire situation."

Crist disagreed and said he wasn't panicked. He called the contract a prudent move.

"The good news is, we were able to get it accomplished before a storm hits Florida," Crist said.

The $224-million is expected to come from the Cat Fund's reserves. That also means fewer dollars are in reserve to pay hurricane claims, possibly causing assessments on policyholders to be triggered after a small storm, Sink noted.

For more than a year, property insurers have complained that they don't trust the Cat Fund, saying they're worried it won't be able to pay after a major storm nor be able to borrow money.

At worst, the fund could be liable for $28-billion in damages, but it has access to only about $8-billion now.

Florida Insurance Council spokesman Sam Miller called the move "gutsy," adding that he was glad the state had done something to address the insurance industry's concerns.