The Scariest Thing About Frankenstorm


If you've peeked at any news outlet in the past couple of days, you're probably aware of the monster storm that's expected to lumber its way up the East Coast. It's such a monster that National Oceanic and Atmospheric Administration's Jim Cisco devised the clever, seasonal, yet ominous name "Frankenstorm," given the storm's gathering collection of hybrid elements -- heavy wind and rain, high tides, and possibly even snow -- and its Halloween-week arrival.

This crazy event is basically a combination of Hurricane Sandy and a nor'easter, either of which would be a formidable and possibly highly destructive storm in its own right. According to Cisco, "We don't have many modern precedents for what the models are suggesting." Batten down the hatches, everybody.

Investors should brace themselves too. The increasing frequency of extreme weather events like this one could wreak havoc on your portfolio, and torches and pitchforks won't drive such monsters out of town.

One heck of a scary Halloween
Already, some analysts are forecasting that Frankenstorm could add up to at least $1 billion in damage on the heavily populated East Coast. That's a big deal for insurers, whose profits really rely on such destructive scenarios not hitting home too often.

It's also a big deal for utility companies, which must scramble to prepare for the storm and work overtime to keep power going as well as to restore it after outages -- which won't be an easy task for a storm forecasters say could stretch into a five-day event.

Furthermore, utilities like Pepco (NYS: POM) and First Energy's (NYS: FE) Jersey Central Power & Light face a huge undertaking given their handling of other storms. Jersey Central faced major scrutiny about its service after Hurricane Irene. Pepco's received the dubious honors of being named "The Most Hated Company in America" according to one survey and falling to the bottom of JD Power and Associates' analyses of customer satisfaction among East Coast utilities in 2011.

Such events aren't a great deal for retailers, either. Grocery stores, discounters, and hardware stores may get a pop in sales from the preliminary scramble to buy emergency items -- water, nonperishable food, batteries, and even big-ticket items like generators -- but then the storm itself would negatively impact sales since many shoppers would likely be holed up at home. A five-day storm, and right before Halloween? Forget it.

You get the picture of the way such events can wreak havoc on many of the cogs that make up positive economic activity.

The perfect storms
Weather can have ripple effects that negatively impact businesses, consumers, and investors. However, some are warning that climate change is causing more extreme weather events than ever before, and that it's time to step up the preparedness for that long-term view.

Ceres, an advocate for sustainability leadership, pointed out that Hurricane Sandy and the "monster storm" scenario is an example of extreme weather events that are becoming "the new normal." Frankenstorm comes about a month after Ceres launched its report "Stormy Future for U.S. Property and Casualty Insurers: The Growing Costs and Risks of Extreme Weather Events."

The report focuses on the insurance industry, which is particularly vulnerable to such a major shift like climate change, and urges the industry to engage in far broader engagement and action. In 2012 alone, more than 25,000 new record highs were set in the U.S., and over the course of the last half-century, heat waves, droughts, and floods have been increasing in intensity and frequency.

In 2011, extreme weather events racked up $32 billion in losses for U.S. property/casualty insurers. We can only guess that 2012 figures could end up daunting, given the devastating drought and monster storms like the one that's on its way to stalk the East Coast.

Fortunately, some in the industry are beginning to address the issue. Allstate (NYS: ALL) has acknowledged climate change and its risks, for example. CEO Tom Wilson told investors in 2011 that severe weather-related losses beyond hurricanes and earthquakes rose fourfold over a three-year period, and that premiums priced for increased frequency of such events is a permanent change. Allstate also made the Carbon Disclosure Project's 2011 leadership index for proactively disclosing climate change information.

In its report, Ceres also pointed to the positive spirit that formed industry group ClimateWise, comprised of 38 organizations including insurers and reinsurers like Prudential (NYS: PRU) , Alliance, and Aviva (NYS: AV) . The ClimateWise pledge is to "lead the way in analyzing and reducing risks; support climate awareness among our customers; incorporate climate change into our investment strategies; inform and engage in public policy debate; and reduce the environmental impact of our businesses ."

Don't ignore the warnings
The insurance industry is the first to come to mind when one contemplates the economic ramifications of extreme, destructive weather, but such events can have impacts on all of the companies we invest in, in different ways.

We investors can batten down our proverbial hatches by noting our companies' policies on climate change, as well as encouraging disclosure from those that lack transparency about their related risks and contingency plans. Seeking out companies that seek to address and correct climate change also makes sense as potential economic impacts grow larger.

The last thing we should do is ignore the coming storms. Rises in related costs can wreak havoc on investors' portfolios.

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