Study: Flood damage erodes companies’ long-term value

Source(s): FM Global
 Factories damaged at Nava Nakorn Industrial, Bangkok. Chatchawin Jampapha /
 Factories damaged at Nava Nakorn Industrial, Bangkok. Chatchawin Jampapha /

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.

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.

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