Companies That Mention Hurricanes in Their 10-Ks Lose 5% of Market Value
Hurricanes are efficient machines of destruction that rack up costs in hidden ways. Especially for corporations.
A new study from commercial mutual insurance and risk consulting company FM Global and risk analytics advisory firm Pentland Analytics suggests that companies can lose a significant longer-term chunk of shareholder value if they’re hit hard by a strong hurricane.
10-K warnings
FM Global identified big public companies that reported financial damage from the storm trio of Harvey, Irma, and Maria in their annual 10-K filings. Dr. Deborah Pretty, Pentland’s founder, analyzed the companies for the impact on shareholder or market value. As it turned out, the straight financial damage was the least of the problems.
Pretty used S&P 500 data to adjust for market forces and such things as stock splits and dividends to isolate the impact on stock prices to get the specific impact on market capitalization. Then she took out financial, insurance, and investment companies, which would normally see significant effects from major storms. That left 52 big publicly-held corporations.
“I don’t usually see an impact on corporate [value] from natural disasters,” Pretty says. For a big company, many millions in property damage can be whisked away by insurance claims. But something bigger was going on—massive opportunity costs that hurt market caps.
“To my surprise—I’ve been working in this field, dare I say, 30 years—I saw a 5% hit.” That is, a company lost an average of 5% of market value in the year following the event. It was a cumulative $18 billion loss of shareholder value for an average per-corporation loss of $346.2 million. No industries or types of businesses fared better in general than others, so long as damage was significant enough to mention in their annual reports.
The trio of hurricanes was unusual powerful but Pretty says the results would apply to any “significant” hurricane.
Anticipating problems
There was a second analysis, too, this time of private data from FM Global about its own clients, which tend to be huge companies. (For example, FM Global insures Disney World and the Walt Disney Company holds a board seat at FM Global.) These companies had “large commercial property exposure”—properties worth $5 million to $2 billion that were in the path of the storms. All received detailed hurricane mitigation suggestions from FM Global.
Pretty split the companies into two groups. One implemented all of the advice, which can include such things as sealing off or moving valuable equipment from areas vulnerable to flooding; installing boom or dike systems to divert water; and repair or upgrade roofs, windows, and doors. Members of the other group didn’t. Companies whose executives implemented the advice “outperformed the ones that didn’t by 10% in model shareholder terms,” Pretty says.
In both studies, the smallest portion of a financial impact came from immediate material losses. “Expenses and costs become historic very quickly,” Pretty says.
The big issue is whether companies put plans and growth on hold. “What we’re seeing in share price is a forward-looking view,” Pretty says. Investors worried about future cash flow and performance as result of strategic plans being disrupted. “What does it do to your reputation with other stakeholders but also the market? It all comes down to governance and effective decision making.”
“There’s a lot you can do to mitigate the effects of mother nature,” says FM Global CFO Kevin Ingram. And investors notice when a company hasn’t.
What businesses and investors can do
Turning any of this into practical corporate management ot investment advice, however, is more difficult than it might seem. A company with 20 locations, each worth $100 million between land and facilities, faces 20 different risk profiles in its portfolio. Executives must also balance budgets against strategic priorities. Which combinations of properties and budgets should have a priority? “It takes time to get all the recommendations completed,” Ingram says.
Also, not all businesses will face the same challenges. Taylor Kovar, CEO at Kovar Capital, is a Texas investment manager with many clients that have oil and gas investments affected by hurricanes.
“Though we have not seen any long-term effects on our portfolios, it definitely causes short-term confusion and volatility when these events occur,” Kovar says. “Oil and gas assets are volatile to begin with, so shifting money from one project to another is nothing new or out of the ordinary. All of my clients have backup plans [if] the weather takes out a production facility. It comes down to managing investor expectations when these events occur.”
Every business has risks, but that doesn’t mean they’re unavoidable. Investors should see whether companies are thinking ahead and taking steps today so they can continue to follow their long-term strategies next week, next month, and next year.
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