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TOP CONTRIBUTORS

Jason Young

Parker Conrad

Patrick Cushing

Hurricane Katrina. Source:NOAA

Companies with negative exposure

• Allstate, Renaissance Reinsurance, Ace limited, and XL Capital are vulnerable to a strong hurricane season because they provide insurance and reinsurance for homes in the Southeast and along the gulf coast. A single storm can result in billions of dollars of damage claims in these areas. Allstate, for example, lost 25% of its assets during the Gulf Coast hurricane season in 2005. Also, Berkshire Hathaway (BRK) generates significant premium volume for reinsuring hurricane risk.

• Exxon Mobil, Royal Dutch Shell, ChevronTexaco, BP and ConocoPhillips are particularly vulnerable to hurricanes, given that they have both production and refining capabilities. Hurricanes have the potential to damage refineries and offshore oil rigs resulting in billions of dollars of lost production.

• Offshore drilling contractors like Diamond Offshore Drilling (DO) and Hercules Offshore (HERO) are also adversely affected by hurricanes. Drilling in hurricane-susceptible regions like the Gulf of Mexico exposes drilling rigs and other facilities to damage by storms. Offshore drilling companies also experience lower utilization rates of their drilling rigs during hurricane seasons.

• Valero and Sunoco have refining businesses but do not participate in oil production. Severe storms, may result in poperty damage and a temporary reduction in refining capacity.

• Enbridge's natural gas and oil transporation pipleines are also vulnerable to hurricanes.

• Dillard's (DDS) stores are located in regions prone to adverse weather, including hurricanes. Severe storms will result in property damage, closing of stores, and disruption of operations.

• BancorpSouth (BXS) - BancorpSouth operates in all of the Gulf Coast states^[2] and is consequently particularly susceptible to problems created by hurricane season. In 2005, 13 of its banking locations along the Mississippi Gulf Coast were damaged;^[3] three branches and a loan office did not reopen until at least 2006.^[3] Hurricane Katrina's impact decreased BXS's net income by $2.2 million ^[3] in spite of a $6.9 million gain from related insurance coverage in 2005.^[4] Expecting that Katrina would increase the amount of loans charged off, BXS increased its provision for credit in 2005 losses by $7.6 million but reversed $5.9 million of that provision during 2006;^[5] Katrina's effect on BXS customers was not as strong as the company expected.^[5]

Companies with positive exposure

• Lowe's, Home Depot, United States Steel and Grainger provide goods and raw materials that can be used for the repair of damaged machinery and property. With concentrations of stores in Texas and Florida, Home Depot and Lowe's services are in greater demand after hurricanes. A Lehman Brothers study found that Home Depot and Lowe's sales increased by around 1% after the 2004 and 2005 hurricane seasons.

• Trico Marine Services (TRMA) provides marine support vessels to the oil and gas industry in the Gulf of Mexico. When hurricanes destroy offshore oil rigs, Trico helps them rebuild. Think drilling bits, fluids, risers, thousands of feet of seafloor cable, manifolds, pipes, pumps, engines, etc – TRMA supplies the vessels that have the infrastructure, equipment, and towing capabilities to create these offshore pseudo-islands.

• SEACOR SMIT (CKH) provides the same services as Trico, with the addition of helicopter equipment and personal transportation.

Hurricane Patterns

The strength of a hurricane season is typically judged based on the following factors: frequency of hurricanes, average duration, greatest duration, average intensity and greatest intensity. These factors increase and decrease roughly in line with naturally occurring cycles known as the multidecadal signal. During these cycles, the Atlantic basin experiences periods(20-30 years or longer) of above average or below average hurricane seasons. Meteorologists believe that we entered into a more hurricane-intensive period of the multidecadal cycle starting in 1995. The NOAA publishes the ACE index which measures the strength of hurricanes based on the aforementioned factors. The median score is 87.5%; 117% represents the lower bound for an above average hurricane season. As seen from the exhibit below the last the period from 1995-2005 has seen above average hurricane seasons with an average index score of 1.75% of the median. Currently the NOAA predicts that there is a 75% chance that the 2007 hurricane season will be above average as well. Historically, the average number of US strikes-hurricanes making landfall- has been between 2-4 during above average seasons. This could translate into greater exposure for insurance and oil companies.

Global Warming

Hurricanes cannot form unless the water temperature reaches at least 80 degrees Fahrenheit. Since the character of hurricanes is influenced by water temperature, there is some speculation that global warming may be contributing to the frequency, duration, and intensity of hurricanes. While numerous studies have suggested that increasing global temperatures have had no effect on the frequency of hurricanes, a recent MIT study published, suggests that it may be a significant contributor to the intensity and duration of hurricanes. According to the study, hurricanes have increased in intensity and duration by 50% since the mid 1970s.

Notes

1. ↑ http://www.prnewswire.com/cgi-bin/stories.pl?ACCT=104&STORY=/www/story/08-21-2007/0004649088&EDATE=
2. ↑ BXS Q308 10-Q pg. 19  
3. ↑ ^{3.0 3.1 3.2} BXS 2005 10-K pg. 24  
4. ↑ BXS 2006 10-K pg. 24  
5. ↑ ^{5.0 5.1}