Study reveals favourable risk/earnings ratio

A Risk/Earnings Ratio Study of more than 500 multinational corporations finds clear correlation between good physical loss prevention and lower earnings volatility.

Commissioned by property insurer FM Global and conducted by Oxford Metrica, an independent strategic advisor to Fortune 500 companies, the Risk/Earnings Ratio Study found that companies with best practice property risk management programmes produced earnings that were, on average, 40% less volatile than companies with less advanced risk management practices.

The study presents evidence of a clear correlation between earnings volatility and physical risk management. Businesses with strong physical risk management programmes produced earnings that fluctuated an average of 18%, compared with an average earnings volatility of more than 30% among companies with weak physical risk management practices.

“The key take-away from this study is clear – good risk management practices have the potential to improve earnings stability, which is a key driver of shareholder value,” said Ruud Bosman, vice-chair, FM Global.

“At the same time, companies that may be considering cutting back on property risk management resources would be well advised to consider the potentially negative bottom line implications of such a move,” added Dr. Deborah Pretty, the Oxford Metrica principal who led the research effort.

The study findings are further supported by FM Global’s internal quantitative research. According to extensive property loss data analysed by FM Global, the average risk of property loss for companies with strong physical risk management practices is 20 times lower than for those with weak physical risk management practices. Companies with inferior practices were more than twice as likely to experience a property loss and related business disruption.

Large businesses with strong risk management programmes compared with those with weak risk management practices, experience on average:

•55 times lower risk of property loss due to fire

•Fire losses that are four times less costly – an average US$725,000 per loss, compared with US$3.2m

•29 times lower risk of property loss caused by hurricanes, earthquakes and other natural hazards

•Natural catastrophe losses that are seven times less costly – an average of US$478,000 per loss compared with US$3.4m

“The research findings make sense,” said Scott Morrison, senior vice-president and chief financial officer of Ball Corporation, a large, publicly traded supplier of metal and plastic consumer packaging products. “The more volatility you take out of your performance the greater the reliability of earnings, which translates into a more consistent valuation by Wall Street. Likewise, the more resources a company earmarks toward reducing physical risk, the higher the opportunity for enhanced shareholder value.”

The study compared the physical risk management practices of 520 multinational companies with more than US$1 billion in annual revenue over a period of three years. Each company’s risk management practices were scored on a 1-to-100 point scale using a proprietary tool developed by FM Global that helps companies quantify and manage physical risk.

“The best kind of physical risk management not only stops bad things from happening, but also has positive bottom line benefits,” Bosman added. “As a company that has been analysing data to help protect our clients’ physical property since our company was founded 175 years ago, companies now have evidence they can use that directly correlates good risk management with shareholder value. Particularly important in today’s challenging market environment, earnings stability and business continuity can offer businesses a clear competitive advantage.”

Download the study at www.fmglobal.com/study