Buffett Makes Out With $224 Million on Hurricane Bet

Talk about a big payout: Warren Buffett's Berkshire Hathaway just scored $224 million on a bet that Florida would escape major hurricane damage in 2008, according to Bloomberg (okay, technically it expires tomorrow.)

Essentially, Florida doubted its ability to raise money after a hurricane. In exchange for $224 million, Buffett pledged to buy $4 billion in bonds to if the state ran into a cash shortfall. Apparently, Florida's Attorney General thought the agreement was a raw deal for the state, stating that the chance of a serious enough hurricane hitting Florida in 2008 was about 3 percent (it turns out that this year was particularly bad in terms of hurricanes--among the five worst since 1944, per the NOAA--but the damage was mostly in Texas and Louisiana.)

Catastrophe bonds, which also cover natural disasters like earthquakes, aren't always a bad deal for states. According to a Milken Institute report:

Catastrophe bonds make a huge amount of sense, in theory. The cost of Hurricane Katrina was over $65 billion in insured losses alone. And that's a fraction of potential damages: coastal property in Florida is worth $1.9 trillion, compared to just $66 billion in Louisiana and Mississippi, where Katrina hit. Values in earthquake-prone California are, if anything, even higher. What's more, uninsured losses, especially in areas of the world which have recently been hit by hurricanes and the 2004 tsunami, are higher still: globally about 25% of catastrophe risks are insured, and in the emerging markets it's 7%.