1 Lesson You Need to Take From Hurricane Sandyhttp://www.fool.com/investing/general/2012/11/09/1-lesson-you-need-to-take-from-hurricane-sandy.aspx Matt Koppenheffer
November 9, 2012
Sandy has a lesson for you, and you don't have to be in the affected area or an investor in directly affected sectors like insurance to learn it. This is a lesson that, if you keep it front and center in your investing, you'll sleep better and likely end up with a fatter portfolio than you otherwise would have.
But that lesson starts with the destructive path of Hurricane Sandy.
Upping the toll
It was a confluence of factors that led to such a massive amount of damage from Sandy. On a conference call explaining how they modeled out Sandy's financial wrath, members of the Eqecat team highlighted the fact that the storm charged ahead to the west over highly populated areas, rather than taking a northern path along the coast as Irene did. An unusually high storm surge was caused by high tide at the height of the storm, a full moon, and the perpendicular path of the storm to the coast.
The storm also ravaged a particularly vulnerable (and costly!) area. There are some $20 trillion in insurable assets in the area that Sandy marched through. Building codes in the Northeast aren't as stout as those in Florida, where nasty hurricanes are a regular concern. And there are also more timber structures and finished basements in the Northeast that are particularly susceptible to storm damage.
Take out one or two of these factors, and the damage wrought by Sandy wouldn't have been as bad. But come together they did, and the results have been jaw-dropping.
And while Irene may have had modest, if any, impact for reinsurers like Berkshire Hathaway's (NYSE: BRK-A ) (NYSE: BRK-B ) General Re and Berkshire Hathaway Reinsurance, the magnitude of Sandy's damage could mean that more losses spill over to reinsurers.
Despite this, nobody is expecting that major insurers will go belly-up from Hurricane Sandy. And really, when all is said and done, it's unlikely that Sandy will hold a candle to the earthquake and tsunami in Japan, which Munich Re estimates led to insured losses of around $40 billion.
In light of these costly disasters, how do insurers manage to keep their heads above water?
Here comes that lesson
If you look at the results of the best insurers -- think Berkshire Hathaway, Travelers, or Markel (NYSE: MKL ) -- you can find significant volatility in underwriting results on a year-to-year or quarter-to-quarter basis. But look at the bigger picture, and you find solid, profitable underwriting that's mad