Prepare for Hurricanes Now or Lose Shareholder Value — It’s Just That Simple

A recent study released by FM Global and commissioned from Pentland Analytics outlines hurricanes' direct effect on shareholder value.
By: | October 6, 2019

As the reality of climate change sinks in ever so quickly, businesses are no longer wondering “if” but “when” they should start to prepare for natural disaster losses.

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A new study released by FM Global provides proof that, from a risk management standpoint, investing in hurricane preparedness strategies is no longer pragmatic, but necessary.

The insurer’s report, “Master the Disaster: Why CFO’s must initiate Hurricane Preparedness in 2019 and Beyond,” examines publicly traded companies and their 10-K filings. It explores their disaster-related losses in 2017, the worst year in history for disaster severity.

Results were obvious: Companies with CFOs that did not invest capital into hurricane preparedness methods were most affected by damage as well as more susceptible to further losses in the future than those that did.

2017 By the Numbers

  • Total global economic damage caused by natural disasters exceeded $337 billion. $233 billion of those losses were uninsured.
  • Three of the season’s hurricanes that brushed U.S. coasts, Harvey, Maria and Irma, ranked among the five worst in history.
  • 8 million acres in the United States alone burned by wildfire, resulting in losses of $18 billion.

Deborah Pretty, founding director, Pentland Analytics

As climate change intensifies, CFO’s investment in preparedness has become a crucial aspect of their responsibilities.

Upon reading the study, however, founding director of Pentland Analytics Deborah Pretty wanted a closer look at the facts.

Pentland Analytics analyzed the 10-K filings of 52 U.S.-based companies that reported financial damage from hurricanes Harvey, Irma or Maria.

By comparing reported damage of companies who followed insurer-distributed disaster-preparedness instructions to companies that did not, it was determined that hurricanes have a direct impact on shareholder value.

“When I saw that a portfolio of companies that disclosed financial damage had been identified, I was curious as to how that might translate into long-term performance for these companies?” said Pretty.

“Is it just a short-term financial hit or is it a longer-term impact?”

A Closer Look

Pretty explained her methodology.

“I modeled their share price reactions to the hurricanes over the subsequent year, stripping out all the market-wide factors in order to reach a clean measurement of impact,” she said.

Across the 52 companies that disclosed damage in the filings, there was a 5% hit to shareholder value. The hit translates into a total loss in market value of $18 billion.

The clients in the data measured were a wide range of companies in the U.S. across a variety of industries that had one thing in common: They were all affected by hurricane damage.

With the disclosed 10-K filings, Pentland Analytics determined that hurricanes impact long-term shareholder value, but there are strategies to offset the risk, including disaster preparedness and the complete knowledge of all possible exposures.

What was most clear, the companies that were most successful were companies that did not have a delay in operations. The key was in protecting the assets and operations even when disaster strikes.

“A prolonged interruption in business can gravely affect a company’s market share, free cash flow, investor confidence, share price, reputation and potential growth opportunities. Such dire impacts are not covered by insurance,” states the FM Global report.

Relying on Governance

“The out-performance is all about their operations not being disrupted. So, as businesses, they can stick to their targets, stick to their strategic plans, uninterrupted. They don’t suffer the disruptions that others do by being less protected,” Pretty said.

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Relying on risk managers who understand the importance of preventative measures is vital to sustainable wealth.

These solutions aren’t free, but businesses reap the benefits through out-performance. As the reality of climate change becomes our every day, so will the incentives to protect our businesses from its effects and unwelcome changes.

“Armed with that evidence, we remind ourselves that as managers we are all custodians of long-term owner value. It then becomes a governance issue if we don’t invest in loss prevention and loss mitigation solutions.” &

Emily Spennato is a staff writer with Risk & Insurance. She can be reached at [email protected]

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The R&I Editorial Team can be reached at [email protected]