"Buffett's Berkshire takes $1 bln bet on lottery"
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Buffett's Berkshire takes $1 bln bet on lottery
NEW YORK, Oct 2 (Reuters) - Billionaire investor Warren Buffett has stepped up to insure the world's largest ever lottery -- offering a top prize of $1 billion -- but experts say the chances of his company having to pay out are slim.
Buffett's National Indemnity, part of his Berkshire Hathaway (NYSE:BRKa - news) insurance and investment group, has written a policy for Grab.com, an Internet lottery launched on Monday, to cover the possibility of a $1 billion payout.
For a premium of ``several million dollars,'' according to Grab.com co-founder and President Andrew Warner, Buffet's firm will pay out the prize money if any players manage to match seven numbers from 1 to 77, which are to be randomly selected by Grab.com (http://www.grab.com) on Dec. 29.
On closer inspection, however, the bet is not too risky for Buffett, an avid bridge player, as the odds of any person matching seven numbers out of 77 is about 2.4 billion to one.
Even if every single person eligible to play -- U.S. residents over 13 and British residents over 18 -- were to enter the contest, the chances of Grab.com paying out the $1 billion prize are about 1,000 to one, according to Columbia University probability expert Charles Heyde.
Even if a lucky winner emerged, Buffet's insurer would not have to pay out all the money at one time.
Any $1 billion winner would have the choice of taking a total of $175 million right away, or having the money paid out in instalments over 40 years without interest -- starting with 20 annual instalments of $5 million, 10 instalments of $10 million and nine of $20 million, followed by a ``balloon payment'' of $620 million in the 40th year.
Given those rates, the agreement is no big deal for National Indemnity, which is used to taking big-ticket reinsurance risks and stands to lose much greater sums if a big earthquake hits California, for example.
Berkshire Hathaway is more likely to make money on the deal, as on top of the multimillion dollar premium, it is also to get a small payment from Grab.com for every player who enters the lottery contest.
Grab.com, set-up by 26-year old Internet entrepreneur Warner and his partner Michael Khalili -- who work under the name Bradford & Reid and have no outside investors -- is planning to reap a profit by selling advertising on its site and offering other competitions in partnership with paying sponsors.
Insuring Grab.com was the hardest part of the project to put in place, Warner told Reuters, saying the company approached several insurers and ended up paying the premium up front. Insurance for lottery-style contests is compulsory under New York state law.<<< |
