Earlier this year, billionaire Warren Buffett made a bet with Florida State. He bet that Florida would escape major damage from hurricanes this year and that the Florida Hurricane Catastrophe Fund would end the season unscathed.
The bet involved Florida paying Buffett $224m for his commitment to buy $4b worth of bonds to finance recovery from hurricanes which hit the state this year. Although the 2008 hurricane season has been an eventful one with heavy losses, it hasn’t affected Florida badly enough to trigger this option agreement, leaving Buffett £224m better off.
The deal was struck to restore confidence in the state catastrophe fund at a time when all the press coverage was around the potential shortfall the state would experience should a major storm hit. The agreement was seen as an easier alternative to trying to sell bonds to investors given the current economic climate.
Perhaps next year Florida will issue catastrophe bonds early enough to sell to investors. This particular deal seems to have paid a much higher coupon than a cat bond would have.
Full story available from Bloomberg.