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Study: Flood damage erodes companies’ long-term value

Stock prices of damaged firms drop 5% in year after major floods, according to new research commissioned by FM Global

JOHNSTON, R.I. USA—If flood is allowed to disrupt your business, your stock value could drop significantly in the next 12 months, reflecting investors’ shaken confidence in your company’s managerial decision-making.

That is according to a new analysis commissioned by FM Global, one of the world’s largest commercial property insurers, and conducted by analytics advisory group Pentland Analytics. The study examined 71 of the world’s largest publicly traded companies, all of which reported financial damage from a major flood event in recent years. Twelve months after those flood losses, their shareholder value had declined by an average of 5%, equivalent to a collective US$82 billion.

The fallen prices reflect investors’ lowered expectations of future cash flow—not the cost of the flood damage itself. “The findings make a strong case for making resilient choices, including smart site selection, emergency planning, structural reinforcement, elevation of critical machines and equipment, and use of flood barriers,” said Bret Ahnell, executive vice president, FM Global.

According to Dr. Deborah Pretty, founder of Pentland Analytics, “Investors increasingly consider flood-related property loss and business disruption as bad management rather than bad luck. Investors evaluate the disruption caused by flood and anticipate the long-term harm to corporate reputation, market share and growth ambitions. They reassessed the future of these disrupted companies and it was 5% worse. That would seem to dwarf the cost of investing in flood protection.”

The new research results confirm similar findings from a precursor study last year on hurricane damage. Accompanying research showed gains for companies that had prioritized property loss prevention.

Methodology
Independent analytics advisory firm Pentland Analytics identified 71 U.S.-listed non-financial companies with at least US$3 billion in revenue that disclosed direct financial damage in their annual 10-K statements owing to any of 10 named flood events on four continents during the past five years. In all of these events, flood was the dominant peril and industry losses exceeded US$1 billion. In modeling the impact on shareholder value, Pentland Analytics risk-adjusted the stock market returns and removed all market wide influences.


About FM Global
Established nearly 200 years ago, FM Global is a mutual insurance company whose capital, scientific research capability and engineering expertise are solely dedicated to property risk management and the resilience of its client-owners. These owners, who share the belief that the majority of property loss is preventable, represent many of the world’s largest organizations, including one of every three Fortune 1000 companies. They work with FM Global to better understand the hazards that can impact their business continuity in order to make cost-effective risk management decisions, combining property loss prevention with insurance protection.

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