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Katrina and the Waves

It is awfully cute to say that you invest "when there is blood running in the streets." It is another thing, entirely, when your investment results are in any way linked to real, corporeal human suffering, be the link direct or counter. Such is the case with companies that have been affected by the massive devastation wrought by Hurricane Katrina.

Lives have been lost. We don't know how many, but given the spellbinding reports from eastern New Orleans by CNN's Jeanne Meserve and others, the human toll from this storm is certain to be much higher than anyone expects at this point.

It is a crass person indeed who does not stop to think about this loss before proceeding to the relatively pedestrian consideration of investing. Still, with the financial impact nearly certain to reach, if not surpass, the $31 billion wrought by Hurricane Andrew in 1992, one should not be blind to the fact that scores of companies will be affected -- positively or negatively.

The parallels to Andrew are quite strong. Andrew devastated south Florida, and then went on to cause additional problems in Louisiana and Mississippi. Katrina slapped South Florida, but saved her real power to maul the Gulf Coast.

Following Andrew, when scores of property/casualty insurers went bankrupt as claims completely swamped their reserves, Florida set up a state-run system to serve as insurer of last resort. Allstate (NYSE: ALL  ) and Prudential (NYSE: PRU  ) , among others, withdrew from the state, to be replaced in part by Berkshire Hathaway (NYSE: BRK.A  ) (NYSE: BRK.B  ) , Aspen Insurance (NYSE: AHL  ) , Partner Re (NYSE: PRE  ) and others.

Now we're going to get to see how well companies top-to-bottom have done in hedging away their risks on the Gulf Coast. I suspect that there will be collapses. Katrina is just too big for every insurance carrier to have been adequately prepared.

Two Motley FoolHidden Gems recommendations, reinsurer Montpelier Re (NYSE: MRH  ) and property insurer United Fire and Casualty (Nasdaq: UFCS  ) , certainly have exposure to the region. This is a reality of business. Damages of this magnitude are going to be expensive for Montpelier Re, United Fire, White Mountains (NYSE: WTM  ) , and other carriers.

On the other hand, if a storm of this magnitude would be expensive for these companies, it will certainly be disastrous for insurers that have had less pricing discipline. Given projected damages, there should be two effects: one, the pricing environment for this segment will get much harder; and two, some of the entrants will -- by choice or by force of losses -- exit business in the region altogether.

Here's something else we can expect: The next time these insurers report, financial commentators will miss this when the next quarter's earnings reports come out. "HUGE losses from Katrina and Dennis crush earnings for XYZ insurer." In terms of covering a quarter (and let's face it -- this is all that the majority of financial commentators are capable of doing) this will be right. In terms of figuring out what the impact will be on these companies over the long term, and what type of pricing environments they'll face on the back end of the disaster, it is doubtful that they could be any more wrong.

Bill Mannis co-advisor to the Motley Fool Hidden Gems newsletter. Montpelier Re and United Fire & Casualty are recommendations of the service. Want to see more? Come take afree 30-day trialtoday and see all that Hidden Gems has to offer.

Bill owns shares of Berkshire Hathaway. The Fool has a strict disclosure policy.

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