Research that pinpoints a correlation between the earnings stability of large multinational corporations and their ability to manage physical plant and other property-related risks

1. The Risk/Earnings Ratio
New Perspectives for Achieving Bottom-Line Stability

2. “The study presents persuasive Eye-Opening Findings Such cutbacks may instigate potential
evidence of a clear correlation earnings volatility to the detriment of
Compelling research into FORTUNE
between earnings and physical shareholders. Maintaining or increas-
1000-size companies pinpoints a cor-
risk management. This should ing these resources, the study con-
relation between the earnings stability
assist finance departments with tends, will guide bottom line improve-
of large multinational corporations
making more informed decisions ments, potentially increasing earnings
and their ability to manage physical
about resource allocations.” stability and shareholder value.
plant and other property-related risks.
Michael Vitacco,
By adopting strong risk management
global fire protection The study of physical risk manage-
practices to prevent fire, natural haz-
manager, Goodyear Tire ment and the potential impact on
ards and other causes of property loss
and Rubber Company earnings stability was commissioned
and business disruption, the findings
by commercial and industrial property
suggest that a company will reduce
insurer FM Global and conducted by
the frequency and severity of these
Oxford Metrica, an independent strate-
loss exposures (if not prevent them),
gic adviser to FORTUNE 500 com-
and may reduce its earnings volatility
panies that provides research-based
too—a striking outcome.
intelligence on all aspects of financial
performance. Oxford Metrica perhaps
The results of this study arrive at a
is best known for its quantitative as-
time when many organizations con-
sessments of critical reputation issues,
tinue to reduce budgeted capital and
measuring the impact of crises on a
other resources across diverse func-
company’s reputation and shareholder
tional areas and operations, including
value performance, and identifying the
physical risk management. While
key drivers of recovery.
reductions in expenses are a critical
necessity for many enterprises, the
research suggests there are nega-
tive consequences to cutting back on
physical loss prevention resources.

3. This new study, according to Dr. out of your performance the greater The bottom line: Companies with
Deborah Pretty, the Oxford Metrica the reliability of earnings, which trans- strong physical risk management
principal who headed the research lates into a more consistent valuation practices, on average, produced earn-
effort and author of Risk Financing by Wall Street. Likewise, the more ings that fluctuated by 17.9 percent,
Strategies: The Impact on Shareholder resources a company earmarks toward whereas companies with weak physical
Value, “indicates both empirically and reducing physical risk, the higher the risk management practices, on average,
quantitatively that there is a strong opportunity for enhanced shareholder had earnings that fluctuated by 31.4
correlation between physical risk value.” Ball Corporation is traded on percent. The stronger the physical
management and earnings stability.” the New York Stock Exchange. risk management practices, the lower
the earnings volatility; the weaker the
Simply put, by pursuing strong physi- Culling the Data physical risk management practices,
cal risk management processes and the higher the earnings volatility. “The
In its research, Oxford Metrica
systems to prevent the likelihood of results reveal a strong correlation be-
compared the physical risk manage-
losses caused by fire, natural hazards, tween earnings stability and property
ment practices of 520 large (more
equipment failure, human error and loss prevention,” Dr. Pretty observes
than US$1 billion in annual revenue)
other perils, a company will poten- (See Chart 1).
multinational companies with these
tially reap a measurable reduction
organizations’ financial performance
in earnings volatility—the degree to The study findings are further support-
over two periods of several years
which earnings fluctuate over a given ed by FM Global’s internal quantita-
each, to increase statistical accuracy.
period of time. tive research. The company, which
In assessing the companies’ manage-
insures one of every three FORTUNE
The study finds that companies, with ment of their physical risks, the firm
1000-size companies in more than 130
best practices in managing their prop- leveraged proprietary data provided
countries, is privy to extensive under-
erty risks, produced earnings on aver- by FM Global, the companies’ global
writing and engineering information
age that were 40 percent less volatile property insurer. FM Global rates its
on its clients’ businesses, their physi-
than companies with less advanced commercial clients on a 1-to-100 scale
cal risks, vulnerabilities, loss history
physical risk management. “The study for property risk management practic-
and risk quality (i.e., level of physical
indicates that resources allocated to es—a score of 100, for example, is an
protection and facility risk manage-
control property risks are well-spent, indicator of exceptional physical risk
ment practices).
given the demonstrable improvement management practices.
in earnings stability, a key driver of
shareholder value,” Dr. Pretty says.
The research findings present persua-
sive evidence of a significant return
on investment in physical risk man- Chart 1
agement. Scott Morrison, senior vice Correlation between Physical Risk Management Practices
president and chief financial officer and Earnings Volatility (2005–07)
of Ball Corporation, a large, publicly
traded supplier of metal and plastic
consumer packaging products, says
17.9%
the correlation is useful data to keep in
mind in terms of resource allocations.
STRONG PRACTICES
“The research findings make sense.
Shutting down one of our 50 plants
worldwide because of a fire, for ex- 31.4%
ample, would obviously affect perfor-
mance. The more volatility you take
WEAK PRACTICES
3

4. “As a public company, earnings stability is a major strategic goal. Now that there is a demonstrated
correlation between physical risk management and earnings, our work takes on even greater meaning. ”
Rick Moroney, environmental, health and safety manager, Raytheon
“We’re in an opportune position to compared with less than US$725,000 A Judicious Investment
evaluate the frequency of property on average for companies with strong
What do these findings mean in terms
losses and their individual severity, physical risk management practices
of corporate performance? Simply
and then compare this information to (See Chart 3).
that preventing the potential of fire
each company’s physical risk manage-
and natural disasters, which are
ment practices,” explains Jeff Burchill, With regard to property exposures
major drivers of property loss and
FM Global senior vice president and related to hurricanes, earthquakes
related business disruptions, provides
chief financial officer. and other natural hazards, overall the
confirmable bottom-line benefits.
average risk for companies with weak
Similarly, investing in preventing two
FM Global has discovered that the risk management practices was 29
other major contributors to property
average risk of a property loss is 20 times larger than those with strong
losses—human error and equipment
times larger for companies with weak practices. The average natural disaster
breakdown—also can enhance corpo-
physical risk management practices loss per location for companies with
rate performance. There are no guar-
than for those with strong physical inferior risk management practices
antees, of course. But, the findings
risk management practices. A location exceeds US$3.4 million per loss,
demonstrate a significant return on
with weak physical risk management compared with an average US$478,000
investment in physical loss prevention.
practices is more than twice as likely for companies with more advanced
to experience a property loss, not to processes. Also, companies with inferior
The most important revelation is the
mention a consequent disruption in its practices were more than twice as likely
apparent correlation between the
business operations. to experience a natural disaster-related
management of property risks and
property loss (See Chart 4).
earnings stability. “The study presents
Factoring in the financial costs of
persuasive evidence of a clear correla-
these losses indicates that the average
tion between earnings and physical
loss at a location deemed to have weak
risk management,” says Michael Vit-
physical risk management practices
acco, global fire protection manager at
exceeds US$3 million, compared
with approximately US$620,000 for a Chart 2
company that manages its physical All Property-Related Perils:
risks well (See Chart 2). Physical Risk Management Practices vs. Average Loss Severity (2005–08)
Further examination of the data
reveals other alarming statistics.
US$620,000
The average risk of a property loss
caused by fire, for example, is 55
STRONG PRACTICES
times greater for a company with
weak physical risk management
practices than for those with strong US$3,000,000
practices. The severity of the fire loss
also is much higher—exceeding an WEAK PRACTICES
average US$3.2 million per loss,
4

5. “Reliability in the performance of our physical assets is a component of our reputation.
The way to improve this reliability is to invest in the physical safety and security of our plants.
”
Scott Morrison, chief financial officer, Ball Corporation
Goodyear Tire and Rubber Company. which of its facilities require immedi- At defense technology giant Raytheon,
“This should assist finance depart- ate upgrades in fire protection equip- a company that self-insures a sig-
ments with making more informed ment. “Companies only have so much nificant portion of its property losses,
decisions about resource allocations.” money to spend on physical upgrades, superior risk management is a “vital
requiring a systematic process for de- objective,” says Rick Moroney, Ray-
Ball Corporation’s CFO points out an- termining which sites require enhance- theon environmental, health and safety
other side benefit to superior physical ments first,” Vitacco explains. manager. “We’ve got a lot of our own
risk management: “Reliability in the money on the line, so it is imperative
performance of our physical assets is a He points to ongoing improvements at for us to understand the physical risks
component of our reputation. The way a Goodyear tire manufacturing plant at our 150 major sites and the hun-
to improve this reliability is to invest in in Taiwan as an example. Small by dreds of smaller facilities we operate.
the physical safety and security of our comparison to other Goodyear plants We model these risks, compare them,
plants. We want our employees to work that have insurable values five times and then make determinations where
in a safe environment and don’t want to higher, the Taiwan plant was among our resources will be budgeted.”
disappoint our customers by not being the least protected Goodyear facilities,
able to supply their needs because of lacking even a basic sprinkler system.
a business disruption. That’s why “We set into motion plans to put in a
improving physical risk management water supply with pumps, tanks and
is a key initiative,” says Morrison. yard mains to feed the hydrants and
sprinklers, even before the plant ex-
Leveraging internal research and loss perienced a small fire in the Banbury
prevention engineering services also mixer that mixes the rubber com-
can advance property risk manage- pounds,” Vitacco says. Upgrades at the
ment at a companies’ facilities. plant are slated for completion within
Goodyear, for instance, has prioritized approximately two years.
Chart 3
Fire:
Physical Risk Management Practices vs. Average Loss Severity (2005–08)
US$724,000
STRONG PRACTICES
US$3,200,000
WEAK PRACTICES
5

6. Chart 4
Natural Catastrophes:
Physical Risk Management Practices vs. Average Loss Severity (2005–08)
US$478,000
STRONG PRACTICES
US$3,400,000
WEAK PRACTICES
A Business Essential “The study indicates that resources allocated to control property risks
The risk managers say the correlation are well-spent, given the demonstrable improvement in earnings
between physical risk management stability, a key driver of shareholder value.
”
and earnings stability gives them the Dr. Deborah Pretty, principal, Oxford Metrica
evidence they need to continue to
make improvements to their facilities.
“Anything that supports our bottom
line objectives—revealing costs that
heretofore may have been hidden—
has value here,” says Moroney. “As a
public company, earnings stability is
a major strategic goal. Now that there
is a demonstrated correlation between
physical risk management and earn-
ings, our work takes on even greater
meaning.”
6

7. About FM Global
For 175 years, many of the world’s largest organizations have worked with FM Global (www.fmglobal.com) to
develop cost-effective property insurance and engineering solutions to protect their business operations from fire,
natural disasters and other types of property risk. The metrics used as the basis for the research and statistics referenced
in this report were derived from RiskMark®, a fact-based analytics tool developed by FM Global that produces data to
help users precisely understand the risk of major property loss at each facility, the potential business impact and
the best solutions to address related vulnerabilities. With clients in more than 130 countries, FM Global ranks among
Fortune magazine’s largest companies in America and is rated A+ (Superior) by A.M. Best and AA (Very Strong)
by Fitch Ratings. The company has been named “Best Property Insurer in the World” by Euromoney magazine and
“Best Global Property Insurer” by Global Finance magazine.
About Oxford Metrica
Oxford Metrica (www.oxfordmetrica.com) is an independent research and analytics firm specializing in corporate
reputation and international investments. Oxford Metrica has been recognized as a leading adviser in managing
reputation recovery from crisis, in evaluating the benefits of establishing an international shareholder base, and in
the provision of analytics on hedge fund performance and asset allocation strategy.

8. For additional information, please contact:
Steven Douvas, assistant vice president, market research
FM Global
270 Central Avenue
Johnston, RI 02919 USA
+1 (1)401 415 1889
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© 2010 FM Global
All rights reserved. www.fmglobal.com
In the United Kingdom:
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Regulated by the Financial Services Authority.