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Global Warming Burning Investors?

By Selena Maranjian – Updated Mar 7, 2017 at 1:58PM

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The insurance industry and others may face some hot water ahead.

Perusing TheProvidence Journal the other day, I ran across an interesting article, titled "NOAA Hiding Truth About Hurricanes, Scientists Say." The gist of it was that the National Oceanic and Atmospheric Administration, according to some folks, is "fudging data and censoring top scientists who link hurricane intensity with global warming." Yikes.

Perhaps fortunately for you, you're not reading this article on a political (or even meteorological) website. So I'm not going to delve into whether the recent storm surge has been fueled by global warming or simply would have happened anyway. Instead, let's look at it from an investing and financial perspective.

For starters, hurricanes pose threats to a wide swath of our economy. According to SFO Magazine, 1992's Hurricane Andrew cost around $43 billion, and Katrina may end up costing twice as much. Hurricane Katrina cost Chevron (NYSE:CVX) some $600 million in income because of lost production days, and it socked many other oil-related concerns as well. There are always some unexpected hits, too. For example, about half of Procter & Gamble's (NYSE:PG) Folger's coffee production happens in New Orleans.

The insurance industry is always hit hard by big disasters; if storms are on the rise, insurers are increasingly at risk. In his latest annual letter to shareholders, Berkshire Hathaway's (NYSE:BRKa) Warren Buffett explained that between 1903 and 2003, three category 5 hurricanes hit the Southeastern and Gulf Coast states, while "there were three category 5s near the coast last year that fortunately weakened before landfall." Buffett went on to explain that he and the heads of his reinsurance businesses don't know whether the recent surge in storms is an anomaly or the beginning of a new and lasting trend. Either way, it's a critical question, especially for investors in insurance companies.

Buffett explained how his team is proceeding in the face of uncertainty:

"What we do know is that our ignorance means we must follow the course prescribed by Pascal in his famous wager about the existence of God. As you may recall, he concluded that since he didn't know the answer, his personal gain/loss ratio dictated an affirmative conclusion. So guided, we've concluded that we should now write mega-cat[astrophe] policies only at prices far higher than prevailed last year -- and then only with an aggregate exposure that would not cause us distress if shifts in some important variable produce far more costly storms in the near future . our caution has intensified. If prices seem appropriate, however, we continue to have both the ability and the appetite to be the largest writer of mega-cat coverage in the world."

There you have it: Bigger storms are a big deal for insurance companies, especially those that "reinsure" other insurance companies against massive losses. Some are hiking their rates in response, and some may end up washed out, if they find they haven't girded themselves sufficiently against many more major storms.

To learn more about several companies in the reinsurance business, read these Stephen Simpson articles, in which he offers his opinions on which firms are most promising for investors:

To learn more about the fascinating world of insurance -- no, really! -- check out Peter L. Bernstein's book Against the Gods: The Remarkable Story of Risk.

Finally, think about the recent spate of hurricanes from a more personal perspective. Ask yourself how protected you and your home are from major hurricanes and other natural disasters. Is your insurance up to date? Do you have enough to cover the cost of reconstructing your home? These articles may help you think through some important issues:

Learn much more about the not-so-exciting-but-still-critical topic of insurance in our Insurance Center. You may not have thought about some kinds of insurance, such as disability or long-term care insurance, but they're vital for many people. And, of course, properly insuring your property is vital, too. Take a little time to learn more; you may be very happy you did, if some calamity occurs in the future.

Montpelier Re has been selected by the Motley Fool Hidden Gems and Motley Fool Stock Advisor newsletters.

Longtime Fool contributor Selena Maranjian owns shares of Berkshire Hathaway. The Fool has a disclosure policy.

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Stocks Mentioned

Chevron Corporation Stock Quote
Chevron Corporation
CVX
$144.77 (-6.53%) $-10.12
The Procter & Gamble Company Stock Quote
The Procter & Gamble Company
PG
$135.58 (-0.46%) $0.63
Arch Capital Group Ltd. Stock Quote
Arch Capital Group Ltd.
ACGL
$43.10 (-1.89%) $0.83
RenaissanceRe Holdings Ltd. Stock Quote
RenaissanceRe Holdings Ltd.
RNR
$137.71 (-0.60%) $0.83
Montpelier Re Holdings Ltd. Stock Quote
Montpelier Re Holdings Ltd.
MRH.DL

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