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As Hurricane Season Begins, Disaster Insurance Runs Short
Summary: Following last year's violent hurricanes, disaster insurance rates from both insurers and their backers ('reinsurers') have risen so sharply that many businesses are now forced to either go without, or pass the exorbitant costs onto their customers. Wal-Mart (NYSE:WMT) announced recently that it would drop its coverage for severe storms because of the costs, and will simply cover any such losses out of pocket. Warren Buffett's Berkshire Hathaway (BRKA) seems to be betting big on reinsurance at this time. Allstate (NYSE:ALL) bought considerable more reinsurance coverage this year: 'In last year's third quarter, the company registered a $1.55 billion hurricane-related loss. Earlier this year, it paid $400 million for $2 billion worth of reinsurance coverage for losses from hurricanes and other catastrophes.' Some Wall St. firms, including hedge funds, have begun employing a financial vehicle known as a 'sidecar' -- backing very specific, time-bound risks at high premiums.
Comment on related stocks/ETFs: In this weekend's Barron's, Jim McTague notes that if this year's hurricane season proves milder than last, publicly-traded insurers could profit enormously from the higher premiums. Some investors are speculating on precisely that scenario.